PREFERRED APARTMENT COMMUNITIES INC - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019


¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-34995

Preferred Apartment Communities, Inc.

(Exact name of registrant as specified in its charter)



Maryland	27-1712193
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

3284 Northside Parkway NW, Suite 150, Atlanta, GA 30327

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (770) 818-4100

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $.01 per share	APTS	NYSE

Securities registered pursuant to Section 12(g) of the Act:

Title of each class

Series A Redeemable Preferred Stock, par value $0.01 per share

Warrant to Purchase Common Stock, par value $0.01 per share

Series M Redeemable Preferred Stock, par value $0.01 per share

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨ Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of the registrant’s Common Stock, as of October 30, 2019 was 45,812,502.



PART I - FINANCIAL INFORMATION

INDEX


Item 1.	Financial Statements	Page No.

	Condensed Consolidated Balance Sheets (unaudited) – as of September 30, 2019 and December 31, 2018	2

	Condensed Consolidated Statements of Operations (unaudited) – Three Months and Nine Months Ended September 30, 2019 and 2018	3

	Condensed Consolidated Statements of Stockholders' Equity (unaudited) – Three Months and Nine Months Ended September 30, 2019 and 2018	4

	Condensed Consolidated Statements of Cash Flows (unaudited) – Nine Months Ended September 30, 2019 and 2018	8

	Notes to Condensed Consolidated Financial Statements (unaudited)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	51

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	77

Item 4.	Controls and Procedures	78

PART II - OTHER INFORMATION		78

Item 1.	Legal Proceedings	78

Item 1A.	Risk Factors	78

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78

Item 3.	Defaults Upon Senior Securities	78

Item 4.	Mine Safety Disclosures	78

Item 5.	Other Information	79

Item 6.	Exhibits	79



Preferred Apartment Communities, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)

(In thousands, except per-share par values)	September 30, 2019			December 31, 2018
Assets
Real estate
Land	$	607,055		$	519,300
Building and improvements	3,117,087			2,738,085
Tenant improvements	151,960			128,914
Furniture, fixtures, and equipment	321,478			278,151
Construction in progress	11,242			8,265
Gross real estate	4,208,822			3,672,715
Less: accumulated depreciation	(382,479		)	(272,042		)
Net real estate	3,826,343			3,400,673
Real estate loan investments, net of deferred fee income and allowance for loan loss	356,272			282,548
Real estate loan investments to related parties, net	25,214			51,663
Total real estate and real estate loan investments, net	4,207,829			3,734,884

Cash and cash equivalents	86,177			38,958
Restricted cash	61,032			48,732
Notes receivable	17,698			14,440
Note receivable and revolving lines of credit due from related parties	23,959			32,867
Accrued interest receivable on real estate loans	27,877			23,340
Acquired intangible assets, net of amortization of $140,832 and $113,199	147,649			135,961
Deferred loan costs on Revolving Line of Credit, net of amortization of $681 and $180	1,454			1,916
Deferred offering costs	2,804			6,468
Tenant lease inducements, net of amortization of $3,128 and $1,833	19,972			20,698
Receivable from sale of mortgage-backed security	—			41,181
Tenant receivables (net of allowance of $0 and $1,662) and other assets	60,948			41,567
Variable Interest Entity ("VIE") assets from mortgage-backed pool, at fair value	610,248			269,946

Total assets	$	5,267,647		$	4,410,958

Liabilities and equity
Liabilities
Mortgage notes payable, net of deferred loan costs and
mark-to-market adjustment of $42,642 and $40,127	$	2,561,837		$	2,299,625
Revolving line of credit	50,000			57,000
Real estate loan investment participation obligation	—			5,181
Unearned purchase option termination fees	5,050			2,050
Deferred revenue	40,663			43,484
Accounts payable and accrued expenses	58,762			38,618
Accrued interest payable	7,853			6,711
Dividends and partnership distributions payable	22,429			19,258
Acquired below market lease intangibles, net of amortization of $21,677 and $15,254	53,033			47,149
Prepaid rent, security deposits, and other liabilities	19,253			17,611
VIE liabilities from mortgage-backed pool, at fair value	585,837			264,886
Total liabilities	3,404,717			2,801,573

Commitments and contingencies (Note 11)

Equity
Stockholders' equity
Series A Redeemable Preferred Stock, $0.01 par value per share; 3,050
shares authorized; 2,047 and 1,674 shares issued; 1,932 and 1,608
shares outstanding at September 30, 2019 and December 31, 2018, respectively	19			16
Series M Redeemable Preferred Stock, $0.01 par value per share; 500
shares authorized; 91 and 44 shares issued; 90 and 44 shares outstanding
at September 30, 2019 and December 31, 2018, respectively	1			—
Common Stock, $0.01 par value per share; 400,067 shares authorized;
45,335 and 41,776 shares issued and outstanding at
September 30, 2019 and December 31, 2018, respectively	453			418
Additional paid-in capital	1,861,446			1,607,712
Accumulated (deficit) earnings	—			—
Total stockholders' equity	1,861,919			1,608,146
Non-controlling interest	1,011			1,239
Total equity	1,862,930			1,609,385

Total liabilities and equity	$	5,267,647		$	4,410,958

The accompanying notes are an integral part of these condensed consolidated financial statements.



Preferred Apartment Communities, Inc.
Condensed Consolidated Statements of Operations
(unaudited)

(In thousands, except per-share figures)	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Revenues:
Rental revenues	$	101,817		$	84,500		$	289,647		$	235,314
Other property revenues	3,232			2,443			8,922			5,791
Interest income on loans and notes receivable	12,608			13,618			35,989			37,576
Interest income from related parties	2,546			3,671			9,980			12,310
Miscellaneous revenues	—			—			1,023			—
Total revenues	120,203			104,232			345,561			290,991

Operating expenses:
Property operating and maintenance	14,928			12,893			38,186			31,805
Property salary and benefits (including reimbursements of $4,681, $4,501,
$12,973 and $12,040 to related party)	5,360			4,911			14,845			13,038
Property management fees (including $2,565, $2,344, $7,534 and $6,604 to related parties)	3,534			2,998			10,174			8,530
Real estate taxes	12,870			10,597			37,914			30,635
General and administrative	1,898			2,221			6,425			6,019
Equity compensation to directors and executives	305			796			922			2,881
Depreciation and amortization	46,239			44,499			137,191			127,210
Asset management and general and administrative expense fees to related party	8,611			7,234			24,649			20,096
Loan loss allowance	—			3,029			—			3,029
Insurance, professional fees and other expenses	3,453			1,713			8,671			5,166
Total operating expenses	97,198			90,891			278,977			248,409

Waived asset management and general and administrative expense fees	(3,081		)	(1,934		)	(8,505		)	(4,583		)

Net operating expenses	94,117			88,957			270,472			243,826

Operating income before gains on sales of real estate and trading investment	26,086			15,275			75,089			47,165
Gains on sales of real estate and trading investment	—			18,605			4			38,961
Operating income	26,086			33,880			75,093			86,126
Interest expense	28,799			25,657			83,166			68,972
Change in fair value of net assets of consolidated VIEs from mortgage-backed pools	591			131			1,316			185
Loss on extinguishment of debt	(15		)	—			(84		)	—
Gain on sale of real estate loan investment	—			—			747			—

Net income (loss)	(2,137		)	8,354			(6,094		)	17,339
Consolidated net (income) loss attributable to non-controlling interests	59			(216		)	138			(456		)

Net income (loss) attributable to the Company	(2,078		)	8,138			(5,956		)	16,883

Dividends declared to preferred stockholders	(29,446		)	(22,360		)	(82,527		)	(62,801		)
Earnings attributable to unvested restricted stock	(5		)	(5		)	(14		)	(13		)

Net loss attributable to common stockholders	$	(31,529	)	$	(14,227	)	$	(88,497	)	$	(45,931	)

Net loss per share of Common Stock available
to common stockholders, basic and diluted	$	(0.71	)	$	(0.35	)	$	(2.02	)	$	(1.16	)

Weighted average number of shares of Common Stock outstanding,
basic and diluted	44,703			40,300			43,703			39,598

The accompanying notes are an integral part of these condensed consolidated financial statements.



Preferred Apartment Communities, Inc.
Condensed Consolidated Statements of Stockholders' Equity
For the three-month period ended September 30, 2019
(Unaudited)

(In thousands, except dividend per-share figures)	Series A and Series M Redeemable Preferred Stock		Common Stock		Additional Paid in Capital			Accumulated Earnings			Total Stockholders' Equity			Non-Controlling Interest			Total Equity

Balance at July 1, 2019	$	19	$	442	$	1,784,197		$	—		$	1,784,658		$	(488	)	$	1,784,170
Issuance of Units	1		—		116,827			—			116,828			—			116,828
Issuance of mShares	—		—		17,156			—			17,156			—			17,156
Redemptions of Series A Preferred Stock	—		9		(2,886		)	—			(2,877		)	—			(2,877		)
Exercises of warrants	—		2		2,480			—			2,482			—			2,482
Syndication and offering costs	—		—		(13,553		)	—			(13,553		)	—			(13,553		)
Equity compensation to executives and directors	—		—		155			—			155			—			155
Conversion of Class A Units to Common Stock	—		—		112			—			112			(112		)	—
Current period amortization of Class B Units	—		—		—			—			—			150			150
Net income (loss)	—		—		—			(2,078		)	(2,078		)	(59		)	(2,137		)
Contributions from Minority Holders	—		—		—			—			—			2,050			2,050
Reallocation adjustment to non-controlling interests	—		—		305			—			305			(305		)	—
Distributions to non-controlling interests	—		—		—			—			—			(225		)	(225		)
Dividends to series A preferred stockholders
($5.00 per share per month)	—		—		(30,094		)	1,983			(28,111		)	—			(28,111		)
Dividends to mShares preferred stockholders
($4.79 - $6.25 per share per month)	—		—		(1,430		)	95			(1,335		)	—			(1,335		)
Dividends to common stockholders ($0.2625 per share)	—		—		(11,823		)	—			(11,823		)	—			(11,823		)
Balance at September 30, 2019	$	20	$	453	$	1,861,446		$	—		$	1,861,919		$	1,011		$	1,862,930

The accompanying notes are an integral part of these condensed consolidated financial statements.



Preferred Apartment Communities, Inc.
Condensed Consolidated Statements of Stockholders' Equity, continued
For the three-month period ended September 30, 2018
(Unaudited)

(In thousands, except dividend per-share figures)	Series A and Series M Redeemable Preferred Stock		Common Stock		Additional Paid in Capital			Accumulated Earnings			Total Stockholders' Equity			Non-Controlling Interest			Total Equity


Balance at July 1, 2018	$	14	$	397	$	1,430,713		$	—		$	1,431,124		$	2,353		$	1,433,477
Issuance of Units	1		—		100,877			—			100,878			—			100,878
Issuance of mShares	—		—		8,199			—			8,199			—			8,199
Redemptions of Series A Preferred Stock	—		7		(49		)	—			(42		)	—			(42		)
Exercises of warrants	—		4		4,572			—			4,576			—			4,576
Syndication and offering costs	—		—		(10,842		)	—			(10,842		)	—			(10,842		)
Equity compensation to executives and directors	—		—		135			—			135			—			135
Conversion of Class A Units to Common Stock	—		—		20			—			20			(20		)	—
Current period amortization of Class B Units	—		—		—			—			—			661			661
Net income (loss)	—		—		—			8,138			8,138			216			8,354
Reallocation adjustment to non-controlling interests	—		—		391			—			391			(391		)	—
Distributions to non-controlling interests	—		—		—			—			—			(271		)	(271		)
Dividends to series A preferred stockholders
($5.00 per share per month)	—		—		(13,883		)	(7,948		)	(21,831		)	—			(21,831		)
Dividends to mShares preferred stockholders
($4.79 - $6.25 per share per month)	—		—		(339		)	(190		)	(529		)	—			(529		)
Dividends to common stockholders ($0.255 per share)	—		—		(10,383		)	—			(10,383		)	—			(10,383		)
Balance at September 30, 2018	$	15	$	408	$	1,509,411		$	—		$	1,509,834		$	2,548		$	1,512,382

The accompanying notes are an integral part of these condensed consolidated financial statements.



Preferred Apartment Communities, Inc.
Condensed Consolidated Statements of Stockholders' Equity
For the nine-month period ended September 30, 2019
(Unaudited)

(In thousands, except dividend per-share figures)	Series A and Series M Redeemable Preferred Stock		Common Stock		Additional Paid in Capital			Accumulated Earnings			Total Stockholders' Equity			Non-Controlling Interest			Total Equity

Balance at January 1, 2019	$	16	$	418	$	1,607,712		$	—		$	1,608,146		$	1,239		$	1,609,385
Issuance of Units	4		—		369,416			—			369,420			—			369,420
Issuance of mShares	—		—		46,765			—			46,765			—			46,765
Redemptions of Series A Preferred Stock	—		26		(8,014		)	—			(7,988		)	—			(7,988		)
Exercises of warrants	—		8		10,066			—			10,074			—			10,074
Syndication and offering costs	—		—		(43,795		)	—			(43,795		)	—			(43,795		)
Equity compensation to executives and directors	—		—		471			—			471			—			471
Conversion of Class A Units to Common Stock	—		1		676			—			677			(677		)	—
Current period amortization of Class B Units	—		—		—			—			—			451			451
Net income (loss)	—		—		—			(5,956		)	(5,956		)	(138		)	(6,094		)
Contributions from Minority Holders	—		—		—			—			—			2,050			2,050
Reallocation adjustment to non-controlling interests	—		—		1,231			—			1,231			(1,231		)	—
Distributions to non-controlling interests	—		—		—			—			—			(683		)	(683		)
Dividends to series A preferred stockholders
($5.00 per share per month)	—		—		(85,078		)	5,727			(79,351		)	—			(79,351		)
Dividends to mShares preferred stockholders
($4.79 - $6.25 per share per month)	—		—		(3,405		)	229			(3,176		)	—			(3,176		)
Dividends to common stockholders ($0.785 per share)	—		—		(34,599		)	—			(34,599		)	—			(34,599		)
Balance at September 30, 2019	$	20	$	453	$	1,861,446		$	—		$	1,861,919		$	1,011		$	1,862,930

The accompanying notes are an integral part of these condensed consolidated financial statements.



Preferred Apartment Communities, Inc.
Condensed Consolidated Statements of Stockholders' Equity, continued
For the nine-month period ended September 30, 2018
(Unaudited)

(In thousands, except dividend per-share figures)	Series A and Series M Redeemable Preferred Stock		Common Stock		Additional Paid in Capital			Accumulated Earnings			Total Stockholders' Equity			Non-Controlling Interest			Total Equity


Balance at January 1, 2018	$	12	$	386	$	1,271,040		$	4,449		$	1,275,887		$	4,879		$	1,280,766
Issuance of Units	3		—		311,719			—			311,722			—			311,722
Issuance of mShares	—		—		21,768			—			21,768			—			21,768
Redemptions of Series A Preferred Stock	—		11		(9,112		)	—			(9,101		)	—			(9,101		)
Exercises of Warrants	—		10		12,943			—			12,953			—			12,953
Syndication and offering costs	—		—		(32,043		)	—			(32,043		)	—			(32,043		)
Equity compensation to executives and directors	—		—		413			—			413			—			413
Conversion of Class A Units to Common Stock	—		1		870			—			871			(871		)	—
Current period amortization of Class B Units	—		—		—			—			—			2,468			2,468
Net income	—		—		—			16,883			16,883			456			17,339
Reallocation adjustment to non-controlling interests	—		—		3,571			—			3,571			(3,571		)	—
Distributions to non-controlling interests	—		—		—			—			—			(813		)	(813		)
Dividends to Series A preferred stockholders
($5.00 per share per month)	—		—		(40,655		)	(20,913		)	(61,568		)	—			(61,568		)
Dividends to mShares preferred stockholders
($4.79 - $6.25 per share per month)	—		—		(814		)	(419		)	(1,233		)	—			(1,233		)
Dividends to common stockholders ($0.76 per share)	—		—		(30,289		)	—			(30,289		)	—			(30,289		)
Balance at September 30, 2018	$	15	$	408	$	1,509,411		$	—		$	1,509,834		$	2,548		$	1,512,382

The accompanying notes are an integral part of these condensed consolidated financial statements.



Preferred Apartment Communities, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)

(In thousands)	Nine Months Ended September 30,
	2019			2018
Operating activities:
Net (loss) income	$	(6,094	)	$	17,339
Reconciliation of net (loss) income to net cash provided by operating activities:
Depreciation and amortization expense	137,191			127,210
Amortization of above and below market leases	(4,525		)	(4,297		)
Deferred revenues and fee income amortization	(4,024		)	(3,103		)
Purchase option termination fee amortization	(6,900		)	(6,554		)
Noncash interest income amortization on MBS, net of amortized costs	(696		)	(185		)
Amortization of market discount on assumed debt and lease incentives	1,492			1,152
Deferred loan cost amortization	4,752			5,213
(Increase) in accrued interest income on real estate loan investments	(7,888		)	(4,385		)
Equity compensation to executives and directors	922			2,881
Gains on sales of real estate and trading investment	(4		)	(38,961		)
Cash received for purchase option terminations	1,330			5,100
Loss on extinguishment of debt	84			—
Gain on sale of real estate loan investments, net	(747		)	—
Non-cash payment of interest on related party line of credit	(637		)	—
Mortgage interest received from consolidated VIEs	13,398			3,429
Mortgage interest paid to other participants of consolidated VIEs	(13,398		)	(3,429		)
Loan loss allowance	—			3,029
Changes in operating assets and liabilities:
(Increase) in tenant receivables and other assets	(12,379		)	(3,518		)
(Increase) in tenant lease incentives	(570		)	(6,786		)
Increase in accounts payable and accrued expenses	22,399			14,470
Increase in accrued interest, prepaid rents and other liabilities	730			3,369
Net cash provided by operating activities	124,436			111,974

Investing activities:
Investments in real estate loans	(74,668		)	(145,413		)
Repayments of real estate loans	—			141,729
Notes receivable issued	(5,399		)	(5,949		)
Notes receivable repaid	2,169			8,941
Note receivable issued to and draws on line of credit by related parties	(30,434		)	(39,377		)
Repayments of line of credit by related parties	26,222			28,566
Proceeds from sale of real estate loan investment, net	747			—
Origination fees received on real estate loan investments	1,347			2,919
Origination fees paid to Manager on real estate loan investments	(674		)	(1,459		)
Purchases of mortgage-backed securities (K program), net of acquisition costs	(18,656		)	—
Mortgage principal received from consolidated VIEs	5,024			705
Purchases of mortgage-backed securities	(12,278		)	(4,739		)
Proceeds from sales of mortgage-backed securities	53,445			—
Acquisition of properties	(442,415		)	(662,918		)
Disposition of properties, net	—			83,636
Receipt of insurance proceeds for capital improvements	746			412
Additions to real estate assets - improvements	(34,251		)	(36,288		)
Deposits (paid) refunded on acquisitions	(952		)	3,552
Net cash used in investing activities	(530,027		)	(625,683		)

Financing activities:
Proceeds from mortgage notes payable	329,905			386,559
Repayments of mortgage notes payable	(106,728		)	(66,875		)
Payments for deposits and other mortgage loan costs	(6,738		)	(7,150		)
Proceeds from real estate loan participants	—			5
Payments to real estate loan participants	(5,223		)	(4,372		)
Proceeds from lines of credit	240,200			362,100
Payments on lines of credit	(247,200		)	(348,200		)
Repayment of the Term Loan	—			(11,000		)
Mortgage principal paid to other participants of consolidated VIEs	(5,024		)	(705		)
Proceeds from repurchase agreements	4,857			—


The accompanying notes are an integral part of these condensed consolidated financial statements.




Preferred Apartment Communities, Inc.
Condensed Consolidated Statements of Cash Flows - continued
(unaudited)

(In thousands)	Nine Months Ended September 30,
	2019			2018
Repayments of repurchase agreements	(4,857		)	—
Proceeds from sales of Units, net of offering costs	380,016			303,391
Proceeds from exercises of Warrants	9,875			16,553
Payments for redemptions of preferred stock	(7,995		)	(9,033		)
Common Stock dividends paid	(33,617		)	(29,488		)
Preferred stock dividends paid	(80,339		)	(61,093		)
Distributions to non-controlling interests	(686		)	(762		)
Payments for deferred offering costs	(3,386		)	(2,862		)
Contributions from non-controlling interests	2,050			—

Net cash provided by financing activities	465,110			527,068

Net increase in cash, cash equivalents and restricted cash	59,519			13,359
Cash, cash equivalents and restricted cash, beginning of year	87,690			73,012
Cash, cash equivalents and restricted cash, end of period	$	147,209		$	86,371


Supplemental cash flow information:
Cash paid for interest	$	76,563		$	62,207

Supplemental disclosure of non-cash investing and financing activities:
Accrued capital expenditures	$	3,952		$	2,379
Writeoff of fully depreciated or amortized assets and liabilities	$	210		$	1,768
Writeoff of fully amortized deferred loan costs	$	1,850		$	—
Lessee-funded tenant improvements, capitalized as landlord assets	$	—		$	11,796
Consolidation of assets of VIEs	$	270,669		$	—
Consolidation of liabilities of VIEs	$	270,669		$	—
Dividends payable - Common Stock	$	11,823		$	10,377
Dividends payable - Series A Preferred Stock	$	9,534		$	7,426
Dividends payable - mShares Preferred Stock	$	714		$	170
Dividends declared but not yet due and payable	$	358		$	216
Partnership distributions payable to non-controlling interests	$	225		$	272
Accrued and payable deferred offering costs	$	252		$	322
Offering cost reimbursement to related party	$	384		$	1,438
Reclass of offering costs from deferred asset to equity	$	7,508		$	2,008
Loan receivables converted to equity for property acquisition	$	47,797		$	—
Fair value issuances of equity compensation	$	719		$	4,972
Mortgage loans assumed on acquisitions	$	41,550		$	47,125
Noncash repayment of mortgages through refinancings	$	65,607		$	37,485

The accompanying notes are an integral part of these condensed consolidated financial statements.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements

September 30, 2019

(unaudited)


1.	Organization and Basis of Presentation

Preferred Apartment Communities, Inc. is a Maryland corporation formed primarily to own and operate multifamily properties and, to a lesser extent, own and operate student housing properties, grocery-anchored shopping centers and strategically located, well leased class A office buildings, all in select targeted markets throughout the United States. As part of our business strategy, we may enter into forward purchase contracts or purchase options for to-be-built multifamily communities and we may make real estate related loans, provide deposit arrangements, or provide performance assurances, as may be necessary or appropriate, in connection with the development of multifamily communities. As a secondary strategy, we may acquire or originate senior mortgage loans, subordinate loans or real estate loans secured by interests in multifamily properties, membership or partnership interests in multifamily properties and other multifamily related assets and invest a lesser portion of our assets in other real estate related investments, including other income-producing property types, senior mortgage loans, subordinate loans or real estate loans secured by interests in other income-producing property types, membership or partnership interests in other income-producing property types as determined by our manager as appropriate for us. At December 31, 2018, the Company was the approximate 97.9% owner of Preferred Apartment Communities Operating Partnership, L.P., the Company's operating partnership. Preferred Apartment Communities, Inc. has elected to be taxed as a real estate investment trust under the Internal Revenue Code of 1986, as amended, commencing with its tax year ended December 31, 2011. The Company is externally managed and advised by Preferred Apartment Advisors, LLC, or its Manager, a Delaware limited liability company and related party (see Note 6).

As of September 30, 2019, the Company had 45,335,043 shares of common stock, par value $0.01 per share, or Common Stock, issued and outstanding and was the approximate 98.2% owner of the Operating Partnership at that date. The number of partnership units not owned by the Company totaled 856,409 at September 30, 2019 and represented Class A OP Units of the Operating Partnership, or Class A OP Units. The Class A OP Units are convertible at any time at the option of the holder into the Operating Partnership's choice of either cash or Common Stock. In the case of cash, the value is determined based upon the trailing 20-day volume weighted average price of the Company's Common Stock.

The Company controls the Operating Partnership through its sole general partner interest and conducts substantially all of its business through the Operating Partnership. The Company has determined the Operating Partnership is a variable interest entity, or VIE, of which the Company is the primary beneficiary. The Company is involved with other VIEs, such as through its investments in mortgage pools from the Freddie Mac K Program, as discussed in Note 4. New Market Properties, LLC owns and conducts the business of our portfolio of grocery-anchored shopping centers. Preferred Office Properties, LLC owns and conducts the business of our portfolio of office buildings. Preferred Campus Communities, LLC owns and conducts the business of our portfolio of off-campus student housing communities. Each of these entities are wholly-owned subsidiaries of the Operating Partnership.

Basis of Presentation

These consolidated financial statements include all of the accounts of the Company and the Operating Partnership presented in accordance with accounting principles generally accepted in the United States of America, or GAAP. The year end condensed balance sheet data was derived from audited financial statements, but does not contain all the disclosures required by GAAP. All significant intercompany transactions have been eliminated in consolidation. Certain adjustments have been made consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair presentation of the Company's financial condition and results of operations. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Amounts are presented in thousands where indicated.

As permitted by the practical expedient within ASC 842, Leases, the Company has elected to report the lease component and non-lease components as one single component within the line entitled Rental Revenues on the Company's Consolidated Statements of Operations. Reimbursement revenue was previously presented in the Company’s Other Property Revenues line item. For presentation purposes, the Company has reclassified its revenue from reimbursements from the Other Property Revenues line into the Rental Revenues line for all periods presented.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)


2.	Summary of Significant Accounting Policies

Variable Interest Entities

A variable interest entity, or “VIE” is an entity that lacks sufficient equity to finance its activities without additional subordinated financial support from other parties, or whose equity holders lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary, which is defined as the party who has a controlling financial interest in the VIE through the (a) power to direct the activities of the VIE that most significantly affect the VIE’s economic performance, and (b) obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. The Company assesses whether it meets the power and benefits criteria and in performing this analysis, the Company considers both qualitative and quantitative factors, including the Company’s ability to control or significantly influence key decisions of the VIE and the obligation or likelihood for the Company to fund operating losses of the VIE. The determination of whether an entity is a VIE, and whether the Company is the primary beneficiary, may involve significant judgment, including the determination of which activities most significantly affect the entities’ performance, and estimates about the current and future fair values and performance of assets held by the VIE. If the Company determines that it meets both the power and benefits criteria of the VIE, the Company is deemed to be the primary beneficiary of the VIE and the Company consolidates the entire VIE entity in its consolidated financial statements. For those VIEs which arise from the Company's investment in mortgage-backed securities and which the Company consolidates, it elects the fair value option, under which the assets and liabilities of the consolidated VIE are carried at fair value. The periodic changes in fair value are included in the earnings of the Company and are reported on the line entitled Change in fair value of net assets of consolidated VIE from mortgage-backed pool on the Company's Consolidated Statements of Operations. See Note 4 for discussion related to the Company’s investments in subordinate tranches of collateralized mortgage-backed pools and Note 15 for fair value disclosures related to a consolidated VIE related to these investments.

Real Estate Loans

The Company carries its investments in real estate loans at amortized cost with assessments made for possible loan loss allowances in the event recoverability of the principal amount becomes doubtful. If, upon testing for possible loan loss allowances, the fair value result of the loan or its collateral is lower than the carrying amount of the loan, an allowance is recorded to lower the carrying amount to fair value, with a loss recorded in earnings. The balances of real estate loans presented on the consolidated balance sheets consist of drawn amounts on the loans, net of unamortized deferred loan origination fees and loan loss allowances.

Interest income on real estate loans and notes receivable is recognized on an accrual basis over the lives of the loans or notes. In the event that a loan or note is refinanced with the proceeds of another loan issued by the Company, any unamortized loan fee revenue from the first loan will be recognized as interest revenue at the date of refinancing. Loan origination fees applicable to real estate loans are amortized over the lives of the loans as adjustments to interest income using the effective interest rate method. The accrual of interest on all these instruments ceases when there is concern as to the ultimate collection of principal or interest. Certain real estate loan assets include limited purchase options and either exit fees or additional amounts of accrued interest. Exit fees or accrued interest due will be treated as additional consideration for the acquired project if the Company purchases the subject property. Additional accrued interest becomes due in cash to the Company on the earliest to occur of: (i) the maturity of the loan, (ii) any uncured event of default as defined in the associated loan agreement, (iii) the sale of the project or the refinancing of the loan (other than a refinancing loan by the Company or one of its affiliates) and (iv) any other repayment of the loan.

Evaluations for the possible need for loan loss allowances are performed for each real estate loan investment at least quarterly. Loan loss allowances are needed when it is deemed probable that all amounts due will not be collected according to the contractual terms of the loan. Depending upon the circumstances and significance of risk related to the collectability of the loan, management may determine that (i) the loan should be accounted for as a non-accrual loan because recovery of all contractual amounts due are deemed improbable and that any amounts subsequently received will be used to reduce the loan’s principal balance, (ii) in the event of a modification to the loan granted by the Company as a concession to the borrower who is experiencing financial difficulty, result in the need to apply troubled debt restructuring (“TDR”) accounting guidance, and/or (iii) an allowance for loan loss is required for the loan based upon the value of the underlying collateral and the Company’s evaluation of a possible shortfall with regards to the loan’s repayment based upon an estimated sales price, additional costs (if necessary), estimated selling costs, and amounts due to all lenders.

In connection with the surveillance review process, the Company’s real estate loan investments are assigned an internal risk rating. The internal risk ratings are based on the loan’s current status as compared to underwriting for certain metrics such as total expected construction cost if overruns are noted, construction completion timing if there are delays, current cap rates within the

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

MSA, leasing status, rental rates, net operating income, expected free cash flow, and other factors management deems important related to the ultimate collectability of the loan. The final internal risk ratings are influenced by other quantitative and qualitative factors that can result in an adjustment to the ratings. Each loan is given an internal risk rating from “A” to “D”. Loans rated an “A” meet all present contractual obligations and there are no indicators which would cause concern for the borrower’s ability to meet all present contractual obligations. Loans rated a “B” meet all present contractual obligations, but exhibited at least one indication of a negative variation from the underwriting for the loan and/or project. Loans rated a “C” exhibit some weakness that deserves management’s close attention and if uncorrected, may result in deterioration of repayment prospects. For these loans, management performs analyses to verify the borrower’s ability to meet all present contractual obligations, including obtaining an appraisal of the underlying collateral for the loan. Based on the available collateral to satisfy the Company’s outstanding principal and interest contractually due, we may provide for an allowance, move the loan to non-accrual status for future interest recognition or continue monitoring the loan. For loans rated a “D”, the collection of all contractual principal and interest is improbable and management has determined to account for the loan as a non-accrual loan and, if appropriate under the circumstances record a loan loss allowance.

The Company's real estate loan investments are collateralized by real estate development projects and secured further by guaranties of repayment from one or more of the borrowers. The Company's lines of credit receivable are typically only collateralized by personal guaranties, but occasionally may be cross-collateralized by interests in other real estate projects. As a result, the Company regularly evaluates the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property, as well as the financial and operating capability of the borrower. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan, and/or (iii) the property’s liquidation value. The Company also evaluates the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, the overall economic environment, real estate sector, and geographic sub‑market in which the borrower operates are considered. Such impairment analyses are completed and reviewed by management, utilizing various data sources, including periodic financial data such as property operating statements, occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, capitalization and discount rates and site inspections.

See the Revenue Recognition section of this Note for other loan-related policy disclosures required by ASC 310-10-50-6.

Purchase Option Terminations

The Company will occasionally receive a purchase option on the underlying property in conjunction with extending a real estate loan investment to the developer of the property. The purchase option is often at a discount to the to-be-agreed-upon market value of the property, once stabilized. If the Company elects not to exercise the purchase option and acquire the property, it may negotiate to sell the purchase option back to the developer and receive a termination fee in consideration. The amount of the termination fee is accounted for as additional interest on the real estate loan investment and is recognized as interest revenue utilizing the effective interest method over the period beginning from the date of election until the earlier of (i) the maturity of the real estate loan investment and (ii) the sale of the property.

Revenue Recognition

Multifamily communities and student housing properties

Rental revenue is recognized when earned from residents of the Company's multifamily communities, which is over the terms of the rental agreements, typically of 9 to 15 months’ duration. The Company evaluates the collectability of amounts due from residents and recognizes revenue from residents when collectability is deemed probable, in accordance with ASC 842-30-25-12. The Company disclosed bad debt expense within the Property Operating and Maintenance expense line item in prior periods, but recorded the reduction in revenue against Rental Revenues and Other Property Revenues, as applicable, for the current period.

The Company evaluated the various ancillary revenues within its multifamily leases, including resident utility reimbursements. Having met the criteria that (i) the timing and pattern of transfer for the lease component and associated non-lease components are the same and (ii) that the lease component, if accounted for separately would be classified as an operating lease, the Company has elected the practical expedient under Lease Accounting, ASC 842, paragraph 10-15-42A, to elect reporting the lease component and non-lease components as one single component under Rental Revenues recognized in accordance with ASC 842. Lease components such as pet rental fees and parking rental fees as well as non-lease components such as utility reimbursements were previously presented in the Company’s Other Property Revenues line item. For presentation purposes, the Company has reclassified

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

its revenue from these revenue sources into Rental Revenues for all periods presented, for comparability. Revenue from utility reimbursements are considered variable lease payments and are recognized in the period in which the related expenses are incurred.

Grocery-anchored shopping centers and office properties

Our retail leases have original lease terms which generally range from three to seven years for spaces under 5,000 square feet and from 10 to 20 years for spaces over 10,000 square feet. Anchor leases generally contain renewal options for one or more additional periods whereas in-line tenant leases may or may not have renewal options. With the exception of anchor leases, the leases generally contain contractual increases in base rent rates over the lease term and the base rent rates for renewal periods are generally based upon the rental rate for the primary term, which may be adjusted for inflation or market conditions. Anchor leases generally do not contain contractual increases in base rent rates over the lease term and the renewal periods. Our leases generally provide for the payment of fixed monthly rentals and may also provide for the payment of additional rent based upon a percentage of the tenant’s gross sales above a certain threshold level (“percentage rent”). Our leases also generally include tenant reimbursements for common area expenses, insurance, and real estate taxes. Utilities are generally paid by tenants either directly through separate meters or through payment of tenant reimbursements. The foregoing general description of the characteristics of the leases in our centers is not intended to describe all leases and material variations in lease terms may exist.

Our office building leases have original lease terms which generally range from 5 to 15 years and generally contain contractual, annual base rental rate escalations ranging from 2% to 3%. These leases may be structured as gross where the tenant’s base rental rate is all inclusive and there is no additional obligation to reimburse building operating expenses, net or NNN where in addition to base rent the tenant is also responsible for its pro rata share of reimbursable building operating expenses, or modified gross where in addition to base rent the tenant is also responsible for its pro rata share of reimbursable building operating expense increases over a base year amount (typically calculated as the actual reimbursable operating expenses in year one of the original lease term).

Base rental revenue from tenants' operating leases is a lease component revenue in the Company's grocery-anchored shopping centers and office properties and is recognized on a straight-line basis over the term of the lease. Revenue based on "percentage rent" provisions that provide for additional rents that become due upon achievement of specified sales revenue targets (as specified in each lease agreement) is recognized only after the tenant exceeds its specified sales revenue target. Revenue from reimbursements of the tenants' share of real estate taxes, insurance and common area maintenance, or CAM, costs represent non-lease component revenue. Having met the criteria that (i) the timing and pattern of transfer for the lease component and associated non-lease components are the same and (ii) that the lease component, if accounted for separately would be classified as an operating lease, the Company has elected the practical expedient under ASC 842, Leases, paragraph 10-15-42A, to elect reporting the lease component and non-lease components as one single component under Rental Revenues recognized in accordance with ASC 842. Reimbursement revenue and percentage rent were previously presented in the Company’s Other Property Revenues line item. For presentation purposes, the Company has reclassified its revenue from reimbursements into Rental Revenues for all periods presented, for comparability. Revenue from reimbursements are considered variable lease payments and are recognized in the period in which the related expenses are incurred. The Company does not record income and offsetting expense for certain variable costs paid directly to third parties by lessees on behalf of lessors.

Non-lease components which do not qualify under the practical expedient primarily include percentage rent, lease termination income and other ancillary revenue (e.g. storage revenue, license fees, late fees, tenant billbacks). These items are recorded under Other property revenues. Lease termination revenues are recognized ratably over the revised remaining lease term after giving effect to the termination notice or when tenant vacates and the Company has no further obligations under the lease. Rents and tenant reimbursements collected in advance are recorded as prepaid rent within other liabilities in the accompanying consolidated balance sheets. The Company evaluated the collectability of the tenant receivable related to rental and reimbursement billings due from tenants and straight-line rent receivables, which represent the cumulative amount of future adjustments necessary to present rental revenue on a straight-line basis, by taking into consideration the Company's historical write-off experience, tenant credit-worthiness, current economic trends, and remaining lease terms. The Company evaluates the collectability of these amounts and recognizes revenue related to tenants where collectability is deemed probable, in accordance with ASC 842-30-25-12. The Company previously recorded bad debt expense within the Property operating and maintenance expense line item, and upon adoption of ASC 842 on January 1, 2019, began recording amounts not deemed probable of collection as a reduction of rental revenues and other property revenues, as applicable.

The Company may provide grocery-anchored shopping center and office building tenants an allowance for the construction of leasehold improvements. These leasehold improvements are capitalized and depreciated over the shorter of the useful life of the improvements or the remaining lease term. If the allowance represents a payment for a purpose other than funding leasehold

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

improvements, or in the event the Company is not considered the owner of the improvements, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue. Determination of the appropriate accounting for the payment of a tenant allowance is made on a lease-by-lease basis, considering the facts and circumstances of the individual tenant lease. When the Company is the owner of the leasehold improvements, recognition of rental revenue commences when the lessee is given possession of the leased space upon completion of tenant improvements. However, when the leasehold improvements are owned by the tenant, the lease inception date is the date the tenant obtains possession of the leased space for purposes of constructing its leasehold improvements. For our office properties, if the improvement is deemed to be a “landlord asset,” and the tenant funded the tenant improvements, the cost is amortized over the term of the underlying lease with a corresponding recognition of rental revenues. In order to qualify as a landlord asset, the specifics of the tenant’s assets are reviewed, including the Company's approval of the tenant’s detailed expenditures, whether such assets may be usable by other future tenants, whether the Company has consent to alter or remove the assets from the premises and generally remain the Company's property at the end of the lease.

Gains on sales of real estate assets

The Company recognizes gains on sales of real estate based on the difference between the consideration received and the carrying amount of the distinct asset, including the carrying amount of any liabilities relieved or assumed by the purchasing counterparty and net of disposition expenses.

Lessee accounting

The Company has evaluated its leases for which it is the lessee to determine the value of any right of use assets and related lease liabilities. The Company has three ground leases related to our office and grocery-anchored shopping center assets, one of which had been recorded at fair value on the Company's balance sheet at acquisition due to a purchase option the Company deemed probable of exercising. These ground leases generally have extended terms (e.g. over 20 years with multiple renewal options) and generally have base rent with CPI-based increases. The Company evaluated its renewal option periods in quantifying its asset and liability related to these ground leases. In determining the value of its right of use asset and lease liability, the Company used discount rates comparable to recent loan rates obtained on comparative properties within its portfolio. The Company’s right of use asset and related lease liability in accordance with ASC 842-20-30 related to these ground leases are recorded within the Tenant Receivables and Other Assets and the Security Deposits and Other Liabilities line items of the balance sheet, respectively. The Company is also the lessee of furniture and equipment leases such as office equipment, which generally are three to five years with minimal rent increases. The Company determined that the related right of use asset and lease liability for its furniture and equipment leases were immaterial.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

New Accounting Pronouncements



Standard	Description	Date of Adoption	Effect on the Consolidated Financial Statements
Recently Adopted Accounting Guidance
ASU 2016-02, Leases (Topic 842) ASU 2018-11, Leases (Topic 842) Targeted Improvements	ASU 2016-02 requires a lessor to separate lease components from non-lease components, such as maintenance services or other activities that transfer a good or service to our residents and tenants in a contract. In July 2018, the FASB issued ASU 2018-11 which allowed for a practical expedient for lessors to elect, by class of underlying assets, to not separate lease and non-lease components if both (1) the timing and pattern of revenue recognition are the same for the non-lease component(s) and related lease component and (2) the combined single lease component would be classified as an operating lease. Additional practical expedients were also provided for under ASU 2018-11 related to expired or existing leases.	January 1, 2019	Having met the criteria that (i) the timing and pattern of transfer for the lease component and associated non-lease components are the same and (ii) that the lease component, if accounted for separately would be classified as an operating lease, the Company has elected the practical expedient within ASU 2018-11, as codified under ASC 842-10-15-42A, to elect reporting the lease component and non-lease components as one single component under Rental Revenues recognized in accordance with ASC 842. This change had no material effect on the timing of revenue recognition. The Company has also elected to implement the package of practical expedients provided within ASU 2018-11, as codified under ASC 842-10-65-1(f), which allows the Company not to reassess whether expired or existing contracts contain leases, its lease classification, and any related initial direct costs.
ASU 2018-20, Leases (ASC 842), Narrow-Scope Improvements for Lessors	ASU 2018-20 eliminates the requirement to record income and offsetting expense for certain variable costs paid for by lessees on behalf of lessors.	January 1, 2019	The Company no longer records income and expense for property taxes paid directly to the taxing authority by a lessee based on this standard. The effect is a reduction of other property revenues and of property tax expense, with no effect upon net income/loss.

Recently Issued Accounting Guidance Not Yet Adopted
ASU 2016-13, Financial Instruments - Credit Losses (ASC 326)	ASU 2016-03 changes how entities will measure credit losses for most financial assets, including loans, which are not measured at fair value through net income. The guidance replaces the existing incurred loss model with an expected loss model for instruments measured at amortized cost, and require entities to record credit allowances for financial assets rather than reduce the carrying amount, as they do today under the other-than temporary impairment model.	January 1, 2020	We are currently evaluating the potential impacts of the new guidance and proposed amendments to the new guidance on our consolidated financial statements. The new guidance specifically excludes financial assets measured at fair value through net income. The Company elected the fair value option for its Freddie Mac K Program investments. Therefore, we expect the impact of the new guidance on accounting for financial assets will be limited to our real estate investment loans and notes and revolving lines of credit. We expect to implement this new guidance using the modified retrospective basis by recording a cumulative effect adjustment to retained earnings on January 1, 2020.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

3. Real Estate Assets

The Company's real estate assets consisted of:



	As of:
	September 30, 2019		December 31, 2018
Multifamily communities:
Properties⁽¹⁾	34	⁽¹⁾	32
Units	10,245		9,768
New Market Properties:
Properties	50	⁽²⁾	45
Gross leasable area (square feet)⁽³⁾	5,644,427		4,730,695
Student housing properties:
Properties	8		7
Units	2,011		1,679
Beds	6,095		5,208
Preferred Office Properties:
Properties	9	⁽²⁾	7
Rentable square feet	2,913,000		2,578,000

⁽¹⁾The acquired second phases of CityPark View and Crosstown Walk communities are managed in combination with the initial phases and so together are considered a single property, as are the Lenox Village and Regent at Lenox Village assets within the Lenox Portfolio.
⁽²⁾One property is owned through a consolidated joint venture.
⁽³⁾The Company also owns approximately 47,600 square feet of gross leasable area of ground floor retail space which is embedded within the Lenox Portfolio and is not included in the totals above for New Market Properties.

Multifamily communities sold

The Company had no sales of multifamily community assets during the nine-month period ended September 30, 2019.

On September 28, 2018, the Company closed on the sale of its 216-unit multifamily community in Philadelphia, Pennsylvania, or Stone Rise, to an unrelated third party for a purchase price of approximately $42.5 million, exclusive of closing costs and resulting in a gain of $18.6 million. Stone Rise contributed approximately $0.5 million of net income to the consolidated operating results of the Company for the nine-month period ended September 30, 2018.

On March 20, 2018, the Company closed on the sale of its 328-unit multifamily community in Raleigh, North Carolina, or Lake Cameron, to an unrelated third party for a purchase price of approximately $43.5 million, exclusive of closing costs, and debt defeasance-related costs and resulted in a gain of $20.4 million. Lake Cameron contributed approximately $0.2 million of net income to the consolidated operating results of the Company for the nine-month period ended September 30, 2018.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

The carrying amounts of the significant assets and liabilities of the disposed properties at the dates of sale were:



	Lake Cameron			Stone Rise
(In thousands)	March 20, 2018			September 28, 2018
Real estate assets:
Land	$	4,000		$	6,950
Building and improvements	21,519			18,860
Furniture, fixtures and equipment	3,687			3,292
Accumulated depreciation	(7,220		)	(6,722		)

Total assets, net	$	21,986		$	22,380

Liabilities:
Mortgage note payable	$	19,736		$	23,520

Multifamily communities acquired

During the nine-month periods ended September 30, 2019 and 2018, the Company completed the acquisition of the following multifamily communities:



Acquisition date	Property	Location	Units

8/8/2019	Artisan at Viera	Melbourne, Florida	259
9/18/2019	Five Oaks at Westchase	Tampa, Florida	218

			477

1/9/2018	The Lux at Sorrel	Jacksonville, Florida	265
2/28/2018	Green Park	Atlanta, Georgia	310
9/27/2018	The Lodge at Hidden River	Tampa, Florida	300

			875

The aggregate purchase prices of the multifamily acquisitions were approximately $117.0 million and $165.6 million for the nine-month periods ended September 30, 2019 and 2018 respectively, exclusive of acquired escrows, security deposits, prepaids, capitalized acquisition costs and other miscellaneous assets and assumed liabilities.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

The Company allocated the purchase prices and capitalized acquisition costs to the acquired assets and liabilities based upon their fair values, as shown in the following table. The purchase price allocations were based upon the Company's best estimates of the fair values of the acquired assets and liabilities.



	Multifamily Communities acquired during the nine months ended September 30,
(In thousands, except amortization period data)	2019			2018

Land	$	9,264		$	18,410
Buildings and improvements	87,098			116,767
Furniture, fixtures and equipment	19,806			27,905
Lease intangibles	2,647			5,681
Prepaids & other assets	75			238
Accrued taxes	(477		)	(684		)
Security deposits, prepaid rents, and other liabilities	(118		)	(342		)

Net assets acquired	$	118,295		$	167,975

Cash paid	$	78,295		$	55,015
Mortgage debt, net	40,000			112,960

Total consideration	$	118,295		$	167,975

Three months ended September 30, 2019:
Revenue	$	842		$	3,851
Net income (loss)	$	(522	)	$	(1,286	)

Nine months ended September 30, 2019:
Revenue	$	842		$	11,481
Net income (loss)	$	(522	)	$	(4,978	)

Capitalized acquisition costs incurred by the Company	$	1,771		$	3,117
Acquisition costs paid to related party (included above)	$	1,216		1,685
Remaining amortization period of intangible
assets and liabilities (months)	8.9			0

Student housing properties acquired

During the nine-month periods ended September 30, 2019 and 2018, the Company completed the acquisitions of the following student housing properties:



Acquisition date	Property	Location	Units	Beds

3/27/2019	Haven49 ⁽¹⁾	Charlotte, NC	322	887

5/10/2018	The Tradition	College Station, TX	427	808
5/31/2018	The Retreat at Orlando	Orlando, FL	221	894
6/27/2018	The Bloc	Lubbock, TX	140	556

			788	2,258

⁽¹⁾The Company effectuated the acquisition via a negotiated agreement whereby the Company accepted the membership interest in the Haven49 project entity in satisfaction of the project indebtedness owed to the Company. See Note 4.

The aggregate purchase price of the student housing property acquisitions for the nine-month period ended September 30, 2019 was approximately $92.4 million. The aggregate purchase price of the student housing property acquisitions for the nine-month

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

period ended September 30, 2018 was approximately $197.0 million. Purchase prices shown are exclusive of acquired escrows, security deposits, prepaid assets, capitalized acquisition costs and other miscellaneous assets and assumed liabilities.



	Student housing properties acquired during the nine-month periods ended September 30,
(In thousands, except amortization period data)	2019			2018

Land	$	7,289		$	23,149
Buildings and improvements	68,163			146,856
Furniture, fixtures and equipment	16,966			27,211
Lease intangibles	983			2,493
Below market leases	—			(54		)
Prepaids & other assets	—			309
Accrued taxes	(158		)	(942		)
Security deposits, prepaid rents, and other liabilities	(2,579		)	(719		)

Net assets acquired	$	90,664		$	198,303

Satisfaction of loan receivables	$	46,397		$	—
Cash paid	2,717			92,212
Mortgage debt, net	41,550			106,091

Total consideration	$	90,664		$	198,303

Three-month period ended September 30, 2019:
Revenue	$	1,914		$	4,500
Net income (loss)	$	32		$	(1,260	)

Nine-month period ended September 30, 2019:
Revenue	$	3,529		$	13,103
Net income (loss)	$	(1,892	)	$	(5,313	)

Capitalized acquisition costs incurred by the Company	$	1,016		$	2,555
Acquisition costs to related party	$	936		$	1,970

Remaining amortization period of intangible
assets and liabilities (months)	0			0

On July 29, 2019, we entered into a purchase and sale agreement to sell six of our student housing properties to a third party. A non-refundable earnest money deposit has been placed into an escrow account by the purchaser and we anticipate the sale to close in the near future. See note 16 for discussion regarding an amendment to this agreement.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

New Market Properties assets acquired

During the nine-month periods ended September 30, 2019 and 2018, the Company completed the acquisition of the following grocery-anchored shopping centers:



Acquisition date	Property	Location	Gross leasable area (square feet)

1/17/2019	Gayton Crossing	Richmond, Virginia	158,316
5/28/2019	Free State Shopping Center	Washington, D.C.	264,152
6/12/2019	Disston Plaza	Tampa - St. Petersburg, Florida	129,150
6/12/2019	Polo Grounds Mall	West Palm Beach, Florida	130,285
8/16/2019	Fairfield Shopping Center ⁽¹⁾	Virginia Beach, Virginia	231,829

			913,732

4/27/2018	Greensboro Village	Nashville, Tennessee	70,203
4/27/2018	Governors Towne Square	Atlanta, Georgia	68,658
6/26/2018	Neapolitan Way	Naples, Florida	137,580
6/29/2018	Conway Plaza	Orlando, Florida	117,705
7/6/2018	Brawley Commons	Charlotte, North Carolina	122,028

			516,174

⁽¹⁾ Property is owned through a consolidated joint venture.

The aggregate purchase price of the New Market Properties acquisitions for the nine-month period ended September 30, 2019 was approximately $178.5 million. The aggregate purchase price of the New Market Properties acquisitions for the nine-month period ended September 30, 2018 was approximately $113.1 million. Purchase prices shown are exclusive of acquired escrows, security deposits, prepaid assets, capitalized acquisition costs and other miscellaneous assets and assumed liabilities.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

The Company allocated the purchase prices to the acquired assets and liabilities based upon their fair values, as shown in the following table. The purchase price allocation was based upon the Company's best estimates of the fair values of the acquired assets and liabilities.



	New Market Properties' acquisitions during the nine-month periods ended September 30,
(In thousands, except amortization period data)	2019			2018

Land	$	57,916		$	33,290
Buildings and improvements	101,873			67,595
Tenant improvements	8,230			5,225
In-place leases	16,080			7,795
Above market leases	2,759			1,383
Leasing costs	5,768			3,152
Below market leases	(10,537		)	(4,359		)
Other assets	98			33
Security deposits, prepaid rents, and other	(748		)	(963		)

Net assets acquired	$	181,439		$	113,151

Cash paid	$	65,526		$	64,918
Mortgage debt	115,913			48,233

Total consideration	$	181,439		$	113,151

Three-month period ended September 30, 2019:
Revenue	$	4,235		$	2,663
Net income (loss)	$	(330	)	$	(134	)

Nine-month period ended September 30, 2019:
Revenue	$	6,413		$	8,023
Net income (loss)	$	(800	)	$	(401	)

Capitalized acquisition costs incurred by the Company	$	4,022		$	1,612
Capitalized acquisition costs paid to related party (included above)	$	1,799		$	1,164
Remaining amortization period of intangible
assets and liabilities (years)	8.3			7.3

Preferred Office Properties assets acquired

During the nine-month periods ended September 30, 2019 and 2018, the Company completed the acquisition of the following office buildings:



Acquisition date	Property	Location	Gross leasable area (square feet)

7/25/2019	CAPTRUST Tower	Raleigh, North Carolina	300,000
7/31/2019	251 Armour Drive	Atlanta, Georgia	35,000

			335,000

1/29/2018	Armour Yards	Atlanta, Georgia	187,000
7/31/2018	150 Fayetteville	Raleigh, North Carolina	560,000

			747,000

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

The aggregate purchase price of the Preferred Office Properties acquisitions for the nine-month period ended September 30, 2019 was approximately $143.0 million. The aggregate purchase price of the Preferred Office Properties acquisitions for the nine-month period ended September 30, 2018 was approximately $239.5 million. Purchase prices shown are exclusive of acquired escrows, security deposits, prepaid assets, capitalized acquisition costs and other miscellaneous assets and assumed liabilities.



	Preferred Office Properties' acquisitions during the nine-month periods ended September 30,
(In thousands, except amortization period data)	2019			2018

Land	$	13,287		$	22,829
Buildings and improvements	110,815			176,869
Tenant improvements	6,489			18,132
In-place leases	6,999			14,650
Above-market leases	1,085			3,114
Leasing costs	3,037			8,501
Below-market leases	(1,827		)	(5,194		)
Prepaid and other assets	—			1,365
Accrued taxes	(98		)	(17		)
Security deposits, prepaid rents, and other liabilities	(238		)	(9,650		)

Net assets acquired	$	139,549		$	230,599

Cash paid	$	56,899		$	76,199
Mortgage debt, net	82,650			154,400

Total consideration	$	139,549		$	230,599

Three-month period ended September 30, 2019:
Revenue	$	2,257		5,974
Net income (loss)	$	(342	)	(289		)

Nine-month period ended September 30, 2019:
Revenue	$	2,257		17,446
Net income (loss)	$	(342	)	(1,563		)

Capitalized acquisition costs incurred by the Company	$	1,734		$	3,405
Acquisition costs paid to related party (included above)	$	1,433		$	2,395
Remaining amortization period of intangible
assets and liabilities (years)	7.4			6.2

The Company recorded aggregate amortization and depreciation expense of:



	Three-month periods ended September 30,				Nine-month periods ended September 30,
(In thousands)	2019		2018		2019		2018
Depreciation:
Buildings and improvements	$	25,509	$	21,084	$	72,686	$	56,918
Furniture, fixtures, and equipment	12,296		12,314		37,961		34,224
	37,805		33,398		110,647		91,142
Amortization:
Acquired intangible assets	8,169		10,874		25,732		35,583
Deferred leasing costs	217		184		670		380
Website development costs	48		43		142		105
Total depreciation and amortization	$	46,239	$	44,499	$	137,191	$	127,210

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

At September 30, 2019, the Company had recorded acquired gross intangible assets of $288.5 million, accumulated amortization of $140.9 million, gross intangible liabilities of $74.7 million and accumulated amortization of $21.7 million. Net intangible assets and liabilities as of September 30, 2019 will be amortized over the weighted average remaining amortization periods of approximately 7.6 and 9.4 years, respectively.

At September 30, 2019, the Company had restricted cash of approximately $17.6 million that was contractually restricted to fund capital expenditures and other property-level commitments such as tenant improvements and leasing commissions.

Purchase Options

In the course of extending real estate loan investments for property development, the Company will often receive an exclusive option to purchase the property once development and stabilization are complete. If the Company determines that it does not wish to acquire the property, it has the right to sell its purchase option back to the borrower for a termination fee in the amount of the purchase option discount.

Effective January 1, 2019, the Company terminated its purchase options on the Sanibel Straights, Newbergh, Wiregrass and Cameron Square multifamily communities and the Solis Kennesaw student housing property, all of which are partially supported by real estate loan investments held by the Company. In exchange, the Company will receive termination fees aggregating approximately $8.3 million from the developers. These fees are treated as additional interest revenue and are amortized over the period ending with the earlier of (i) the sale of the underlying property and (ii) the maturity of the real estate loans. For the nine-month period ended September 30, 2019, the Company recorded approximately $3.4 million of interest revenue related to these 2019 purchase option terminations in addition to approximately $3.5 million of interest revenue for the 464 Bishop and Haven49 purchase options that terminated in the second quarter 2018.

4. Real Estate Loans, Notes Receivable, and Line of Credit

Our portfolio of fixed rate, interest-only real estate loans consisted of:



(In thousands)	September 30, 2019			December 31, 2018
Number of loans	21			19

Drawn amount	$	383,216		$	336,329
Deferred loan origination fees	(1,730		)	(2,118		)
Carrying value	$	381,486		$	334,211

Unfunded loan commitments	$	74,656		$	164,913
Weighted average current interest, per annum (paid monthly)	8.48		%	8.47		%
Weighted average accrued interest, per annum	3.66		%	5.24		%



(In thousands)	Principal balance			Deferred loan origination fees			Loan loss allowance		Carrying value
Balances as of December 31, 2018	$	336,329		$	(2,118	)	$	—	$	334,211
Loan fundings	74,668			—			—		74,668
Loans settled with acquisitions	(27,781		)	—			—		(27,781		)
Loan origination fees collected	—			(674		)	—		(674		)
Amortization of loan origination fees	—			1,062			—		1,062
Balances as of September 30, 2019	$	383,216		$	(1,730	)	$	—	$	381,486

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)



Property type	Number of loans	Carrying value		Commitment amount		Percentage of portfolio
(In thousands)
Multifamily communities	16	$	326,839	$	385,373	86	%
Student housing properties	3	38,582		40,448		10	%
New Market Properties	1	12,857		12,857		3	%
Preferred Office Properties	1	3,208		19,193		1	%
Balances as of September 30, 2019	21	$	381,486	$	457,871

Effective June 30, 2019, the Company amended and sold its senior construction loan on the 8West office development to a third party and collected a gross fee of $1.55 million from the buyer.

The Company's Palisades real estate loan investment was subject to a loan participation agreement with an unaffiliated third party, under which the syndicate was to fund approximately 25% of the loan commitment amount and collectively receive approximately 25% of interest payments, returns of principal and purchase option discount (if applicable). On March 13, 2019, the Company repurchased the loan participant's 25% balance in the loan from the loan participant and at September 30, 2019, carried the entire loan balance on its consolidated balance sheet without reflection of any liability to any third party.

The Company's real estate loan investments are collateralized by 100% of the membership interests of the underlying project entity, and, where considered necessary, by unconditional joint and several repayment guaranties and performance guaranties by the principal(s) of the borrowers. These guaranties generally remain in effect until the receipt of a final certificate of occupancy. All of the guaranties are subject to the rights held by the senior lender pursuant to a standard intercreditor agreement. Prepayment of the real estate loans are permitted in whole, but not in part, without the Company's consent.

Management monitors the credit quality of the obligors under each of the Company's real estate loans by tracking the timeliness of scheduled interest and principal payments relative to the due dates as specified in the loan documents, as well as draw requests on the loans relative to the project budgets. In addition, management monitors the actual progress of development and construction relative to the construction plan, as well as local, regional and national economic conditions that may bear on our current and target markets. The credit quality of the Company’s borrowers is primarily based on their payment history on an individual loan basis, and the Company assigns risk ratings to its real estate loans and notes receivable in credit quality categories as described in Note 2.

The Company continues to monitor each loan and note receivable for potential deterioration of risk ratings and can make no assurances that economic or industry conditions or other circumstances will not lead to future loan loss allowances.

At September 30, 2019, the Company's portfolio of real estate loan investments by credit quality indicator was:



(In thousands)
Rating indicator	Principal balance		Accrued interest		Receivables for purchase option terminations		Total
A	$	377,100	$	26,669	$	8,340	$	412,109
B	—		—		—		—
C	6,116		1,208		—		7,324
D	—		—		—		—

	$	383,216	$	27,877	$	8,340	$	419,433

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

At September 30, 2019, the Company's portfolio of notes and lines of credit receivable consisted of:



Borrower	Date of loan	Maturity date	Total loan commitments		Outstanding balance as of:						Interest rate
Borrower	Date of loan	Maturity date	Total loan commitments		September 30, 2019			December 31, 2018			Interest rate
(In thousands)
Preferred Capital Marketing Services, LLC ⁽¹⁾	1/24/2013	12/31/2019	$	1,500	$	650		$	763		10	%
Preferred Apartment Advisors, LLC ^(1,2)	8/21/2012	12/31/2019	22,000		14,299			9,778			7.5	%	⁽³⁾
Haven Campus Communities, LLC ^(1,4)	6/11/2014	12/31/2018	11,660		9,011			11,620			8	%
Oxford Capital Partners, LLC ⁽⁵⁾	10/5/2015	6/30/2020	8,000		5,313			4,022			10	%
Newport Development Partners, LLC	6/17/2014	6/30/2020	2,000		920			—			12	%
Mulberry Development Group, LLC ⁽⁶⁾	3/31/2016	6/30/2020	750		525			465			12	%
360 Capital Company, LLC ⁽⁶⁾	5/24/2016	12/31/2019	3,400		3,394			3,100			12	%
360 Capital Company, LLC ⁽⁷⁾	7/24/2018	12/31/2020	8,000		7,588			6,923			8.5	%
Haven Campus Communities Charlotte Member, LLC ⁽¹⁾	8/31/2018	N/A	—		—			10,788			15	%
Unamortized loan fees					(43		)	(152		)

			$	57,310	$	41,657		$	47,307

⁽¹⁾See related party disclosure in Note 6.
⁽²⁾ The amounts payable under this revolving credit line were collateralized by an assignment of the Manager's rights to fees due under the Sixth Amended and Restated Management Agreement between the Company and the Manager, or the Management Agreement.
⁽³⁾Effective January 1, 2019, the interest rate was increased from 6.0% per annum to 7.5% per annum and the maturity date was extended to December 31, 2019.
⁽⁴⁾The amount payable under this note is collateralized by one of the principals of the borrower's 49.49% interest in an unrelated shopping center located in Atlanta, Georgia and a personal guaranty of repayment by the principals of the borrower.
⁽⁵⁾ The amounts payable under the terms of this revolving credit line, up to the lesser of 25% of the loan balance or $2.0 million, are collateralized by a personal guaranty of repayment by the principals of the borrower.
⁽⁶⁾ The amounts payable under the terms of these revolving credit lines are collateralized by a personal guaranty of repayment by the principals of the borrower.
⁽⁷⁾The amount payable under the note is collateralized by the developer's interest in the Fort Myers multifamily community project and a personal guaranty of repayment by the principals of the borrower.

On November 20, 2018, the borrower on the Haven Campus Communities, LLC line of credit defaulted on the loan, triggering the accrual of an additional 10% default interest rate, which is incremental to the original 8% current interest rate. The amount of default interest recorded through September 30, 2019 was approximately $880,000. Under the terms of the loan, amounts collected are applied first to any legal costs incurred by the Company to collect amounts due on the loan; second, to pay any accrued default and current interest on the loan; and third, to repay the principal amount owed.

Based on the negotiated agreement between the Company and the borrowers, on March 27, 2019, the Company received the membership interests of the Haven49 student housing project in exchange for the complete settlement of the related Haven49 loans, which include the Haven Campus Communities Charlotte Member, LLC line of credit, the Haven49 mezzanine loan and the Haven49 member loan. Additionally, under the same agreement, the Company received payouts and credits totaling approximately $3.8 million towards the Haven Campus Communities, LLC line of credit. These amounts were applied in accordance with the terms of the line of credit. The Company retains a pledge of a 49.49% interest in an unrelated shopping center located in Atlanta, Georgia as collateral on the Haven Campus Communities, LLC line of credit, as well as personal guaranties of repayment from the principals of the borrower.

In January 2019 the Company filed a lawsuit to collect the amounts owed under the line of credit it provided to Haven Campus Communities, LLC. In September 2019, Haven Campus Communities, LLC answered the lawsuit and filed counterclaims against the Company and its affiliates. At this time, the case is in the early stages of discovery, so the Company is unable to make any estimates on timing or amounts that may be collected by the Company on its Haven Campus Communities, LLC line of credit.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

The Company recorded interest income and other revenue from these instruments as follows:



Interest income	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2019		2018		2019		2018
Real estate loans:
Current interest payments	$	8,083	$	6,974	$	23,031	$	24,164
Additional accrued interest	3,471		4,391		10,040		14,587
Origination fee amortization	283		250		1,063		1,288
Purchase option termination fee amortization	1,283		4,791		6,900		7,261

Total real estate loan revenue	13,120		16,406		41,034		47,300
Interest income on notes and lines of credit	1,865		883		4,278		2,586
Interest income from bank and money market accounts	169		—		562		—
Interest income from agency mortgage-backed securities	—		—		95		—

Interest income on loans and notes receivable	$	15,154	$	17,289	$	45,969	$	49,886

The Company extends loans for purposes such as to partially finance the development of multifamily residential communities, to acquire land in anticipation of developing and constructing multifamily residential communities, and for other real estate or real estate related projects. Certain of these loans include characteristics such as exclusive options to purchase the project within a specific time window following project completion and stabilization, the sufficiency of the borrowers' investment at risk and the existence of payment and performance guaranties provided by the borrowers, any of which can cause the loans to create variable interests to the Company and require further evaluation as to whether the variable interest creates a VIE, which would necessitate consolidation of the project.

The Company considers the facts and circumstances pertinent to each entity borrowing under the loan, including the relative amount of financing the Company is contributing to the overall project cost, decision making rights or control held by the Company, guarantees provided by third parties, and rights to expected residual gains or obligations to absorb expected residual losses that could be significant from the project. If the Company is deemed to be the primary beneficiary of a VIE, consolidation treatment would be required.

The Company has no decision making authority or power to direct activity, except normal lender rights, which are subordinate to the rights of the senior lenders on the projects. The Company has concluded that it is not the primary beneficiary of the borrowing entities and therefore it has not consolidated these entities in its consolidated financial statements. The Company's maximum exposure to loss from these loans is their drawn amount as of September 30, 2019 of approximately $383.2 million. The maximum aggregate amount of loans to be funded as of September 30, 2019 was approximately $457.9 million, which includes approximately $74.7 million of loan committed amounts not yet funded.

The Company has evaluated its real estate loans, where appropriate, for accounting treatment as loans versus real estate development projects, as required by ASC 310. For each loan, the characteristics and the facts and circumstances indicate that loan accounting treatment is appropriate.

The Company is also subject to a geographic concentration of risk that could be considered significant with regard to the 464 Bishop, Dawsonville Marketplace, Falls at Forsyth, Newbergh, Newbergh Capital, Solis Kennesaw, Solis Kennesaw Capital, Solis Kennesaw II, 8West and Kennesaw Crossing real estate loan investments, all of which are partially supporting various real estate projects in or near Atlanta, Georgia. The drawn amount of these loans as of September 30, 2019 totaled approximately $104.7 million (with a total commitment amount of approximately $134.2 million) and in the event of a total failure to perform by the borrowers and guarantors, would subject the Company to a total possible loss of the drawn amount.

Freddie Mac K Program investments

On May 23, 2018, the Company purchased a subordinate tranche of Series 2018-ML04, a pool of 20 multifamily mortgages with a total pool size of approximately $276.3 million, from Freddie Mac. The purchase price of the subordinate tranche was approximately $4.7 million and has a weighted average maturity of approximately 16 years, at which time the Company will collect the face value of its tranche of $27.6 million. The yield to maturity of the subordinate tranche is expected to be approximately 11.5% per annum.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

On March 28, 2019, the Company purchased a subordinate tranche of Series 2019-ML05, a pool of 21 multifamily mortgages with a total pool size of approximately $295.7 million, from Freddie Mac. The Company's tranche of the 2019-ML05 pool pays monthly interest of approximately $103,000. The purchase price of the subordinate tranche was approximately $18.4 million and has a weighted average maturity of approximately 16.1 years, at which time the Company will collect the face value of its tranche of $29.6 million. The yield to maturity of the subordinate tranche is expected to be approximately 8.9% per annum.

The Company has evaluated the structure of the investments under the VIE rules and has determined that, due to the Company's position as directing certificate holder of the two mortgage pools, it is in the position most able to influence the financial performance of the trusts. As the subordinate tranche holder, the Company also holds the first loss position of the mortgage pools. As such, the Company is deemed to be the primary beneficiary of the VIEs and has consolidated the assets, liabilities, revenues, expenses and cash flows of both trusts in its consolidated financial statements as of and for the three-month and nine-month periods ended September 30, 2019. The Company's maximum exposure to loss from the combined mortgage pools from the Freddie Mac K program is approximately $24.4 million. The Company has no recourse liability to either the creditors or other beneficial interest holders of either investment.

Agency Mortgage-Backed Securities investments

In December 2018, the Company began investing in Agency Mortgage-Backed Securities representing undivided (or “pass-through”) beneficial interests in specified pools of fixed-rate mortgage loans. The investments are classified as trading securities. On December 20, 2018, the Company sold its entire position of a pool with associated premium amounts totaling $41.1 million. At December 31, 2018, the Company held a receivable related to this sale transaction of $41.2 million, which was collected upon the settlement of the transaction in January 2019.

5. Redeemable Preferred Stock and Equity Offerings

At September 30, 2019, the Company's active equity offerings consisted of:


•	an offering of a maximum of 1,500,000 Units, with each Unit consisting of one share of Series A Redeemable Preferred Stock, par value $0.01 per share, and one Warrant to purchase up to 20 shares of Common Stock (the "$1.5 Billion Unit Offering");


•	an offering of up to a maximum of 500,000 shares of Series M Redeemable Preferred Stock (“mShares”), par value $0.01 per share (the “mShares Offering”);


•	an offering of up to $400 million of equity or debt securities (the "2019 Shelf Offering"), including an offering of up to $125 million of Common Stock from time to time in an "at the market" offering (the "2019 ATM Offering"); and


•	an offering of up to 1,000,000 Shares of Series A1 Redeemable Preferred Stock ("Series A1 Preferred Stock"), Series M1 Redeemable Preferred Stock ("Series M1 Preferred Stock"), or a combination of both (collectively the "Series A1/M1 Offering").

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

Certain offering costs are not related to specific closing transactions and are recognized as a reduction of stockholders' equity in the proportion of the number of instruments issued to the maximum number of Units anticipated to be issued. Any offering costs not yet reclassified as reductions of stockholders' equity are are reflected in the asset section of the consolidated balance sheets as deferred offering costs.

As of September 30, 2019, cumulative gross proceeds and offering costs for our active equity offerings consisted of:



(In thousands)							Deferred Offering Costs
Offering	Total offering				Gross proceeds as of September 30, 2019		Reclassified as reductions of stockholders' equity		Recorded as deferred assets		Total		Specifically identifiable offering costs ⁽¹⁾		Total offering costs
$1.5 Billion Unit Offering	$	1,500,000			$	1,057,127	$	7,327	$	1,336	$	8,663	$	99,510	$	108,173
mShares Offering	500,000				90,991		3,468		344		3,812		3,451		7,263
2016 Shelf Offering	300,000		⁽²	⁾	98,080		2,062		—		2,062		3,001		5,063
2019 Shelf Offering	400,000		⁽³	⁾	—		—		819		819		—		819
Series A1/M1 Offering	1,000,000		⁽⁴	⁾	—		—		305		305		—		305

Total	$	3,700,000			$	1,246,198	$	12,857	$	2,804	$	15,661	$	105,962	$	121,623

⁽¹⁾These offering costs specifically identifiable to Unit offering closing transactions, such as commissions, dealer manager fees, and other registration fees, are reflected as a reduction of stockholders' equity at the time of closing.

⁽²⁾ The $300 million 2016 Shelf Offering expired in second quarter 2019, and therefore all remaining deferred offering costs were reclassified as reductions of stockholder's equity.

⁽³⁾ On April 25, 2019, the Company's 2019 Shelf Registration Statement was declared effective.

⁽⁴⁾On September 27, 2019, the Company's Series A1/M1 Registration Statement was declared effective.

Aggregate offering expenses of the $1.5 Billion Unit Offering, including selling commissions and dealer manager fees, and of the mShares Offering, including dealer manager fees, are each individually capped at 11.5% of the aggregate gross proceeds of the two offerings. The Company will reimburse its Manager up to 1.5% of the gross proceeds of such offerings for all organization and offering expenses that are incurred by the Manager. However, upon approval by the conflicts committee of the board of directors, the Company may reimburse its Manager for any such organization and offering expenses incurred above the 1.5% amount as permitted by the Financial Industry Regulatory Authority, or FINRA. Dealer manager fees for both offerings and sales commissions for the $1.5 Billion Unit Offering are not reimbursable.

Series A1/M1 Preferred Stock Offering

On September 27, 2019, the Company’s registration statement on Form S-3 (Registration No. 333-233576) (the “Series A1/M1 Registration Statement”) was declared effective by the SEC. Shares of Series A1 Preferred Stock and Series M1 Preferred Stock issued under the Series A1/M1 Registration Statement are each offered at a price of $1,000 per share, subject to adjustment under certain conditions.

Each share of Series A1 Preferred Stock ranks senior to Common Stock with respect to dividend rights and carries a cumulative annual 6% dividend of the stated per share value of $1,000, payable monthly as declared by the Company’s board of directors. Dividends begin accruing on the date of issuance. The redemption schedule of the Series A1 Preferred Stock allows redemptions at the option of the holder from the date of issuance through the first year subject to a 13% redemption fee. After year one, the redemption fee decreases to 10%, after year two the redemption fee decreases to 5% and after year three there is no redemption fee. Any redeemed shares of Series A1 Preferred Stock are entitled to any accrued but unpaid dividends at the time of the redemption and any redemptions may be in cash or Common Stock, at the Company’s discretion.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

Each share of Series M1 Preferred Stock ranks senior to Common Stock with respect to dividend rights and carries a cumulative annual dividend beginning at 6.1% of the stated per share value of $1,000, payable monthly as declared by the Company’s board of directors. The annual dividend rate increases by 0.1% on each anniversary of the issuance date up to a maximum annual dividend rate of 7.1%. Dividends begin accruing on the date of issuance. The redemption schedule of the Preferred Stock allows redemptions at the option of the holder from the date of issuance of the Series M1 Preferred Stock through the first year at the stated value per share minus dividends paid for the three most previous dividend declaration dates. After year one, the shares of Series M1 Preferred Stock may be redeemed at 100% of the stated value per share. Any redeemed shares of Series M1 Preferred Stock are entitled to any accrued but unpaid dividends at the time of redemption and any redemptions may be in cash or Common Stock, at the Company’s discretion.

Both the Series A1 Preferred Stock and the Series M1 Preferred Stock are callable by the Company after the second anniversary of the date of original issuance at 100% of the stated value per share.

Aggregate offering expenses of the Series A1/M1 Preferred Stock Offering, including selling commissions and dealer manager fees for the Series A1 Preferred Stock and only dealer manager fees for the Series M1 Preferred Stock, are each individually capped at 12.0% of aggregate gross proceeds of the offering. The Company will reimburse its Manager up to 2.0% of the gross proceeds of such offerings for all organization and offering expenses that are incurred by the Manager. However, upon approval by the conflicts committee of the board of directors, the Company may reimburse its Manager for any such organization and offering expenses incurred above the 2.0% amount as permitted by the Financial Industry Regulatory Authority, or FINRA. Dealer manager fees and sales commissions for the Series A1/M1 Preferred Stock Offering are not reimbursable.

The shares are being offered by Preferred Capital Securities, LLC, or PCS, an affiliate of the Company, on a "reasonable best efforts" basis. The Company intends to invest substantially all the net proceeds of the Series A1/M1 Registration Statement in connection with the acquisition of multifamily communities, other real estate-related investments and general working capital purposes.

6. Related Party Transactions

On April 16, 2018, John A. Williams, the Company's Chief Executive Officer and Chairman of the Board, passed away. The Company's Haven 12 real estate loan investment and Haven Campus Communities LLC line of credit are both supported in part by a guaranty of repayment and performance by John A. Williams, Jr., John A. Williams' son. Because the terms of these loans were negotiated and agreed upon while John A. Williams was the Chief Executive Officer of the Company, these instruments will continue to be reported as related party transactions until the loans are repaid. The Company named Daniel M. DuPree as Chairman of the Board of Directors and Chief Executive Officer of the Company. Leonard A. Silverstein was named Vice Chairman of the Board of Directors and continues as the Company's President and Chief Operating Officer.

On March 27, 2019, the Company's Haven49 and Haven49 Member real estate loan investments and the Haven Campus Communities Charlotte Member LLC line of credit were deemed satisfied in full in connection with the Company's acceptance of the borrowers' membership interests in the underlying Haven49 project.

Messrs. DuPree and Silverstein are executive directors of NELL Partners, Inc., which controls the Manager. Mr. DuPree is the Chief Executive Officer and Mr. Silverstein is the President and Chief Operating Officer of the Manager.

The Company's Wiregrass and Wiregrass Capital real estate loan investments are partially financing the development of a multifamily community in Tampa, Florida by the Altman Companies. Timothy A. Peterson is a member of management of the Altman Companies as well as Chairman of the Audit Committee of the Company's Board of Directors. The Wiregrass loans therefore qualify as related party transactions.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

The Management Agreement entitles the Manager to receive compensation for various services it performs related to acquiring assets and managing properties on the Company's behalf:



(In thousands)		Three-month periods ended September 30,				Nine-month periods ended September 30,
Type of Compensation	Basis of Compensation	2019		2018		2019		2018

Acquisition fees	1.0% of the gross purchase price of real estate assets	$	2,864	$	2,606	$	5,467	$	7,226
Loan origination fees	1.0% of the maximum commitment of any real estate loan, note or line of credit receivable	148		249		674		1,460
Loan coordination fees	0.6% of any assumed, new or supplemental debt incurred in connection with an acquired property	1,100		1,048		2,065		2,602
Asset management fees	Monthly fee equal to one-twelfth of 0.50% of the total book value of assets, as adjusted	3,981		3,742		11,546		11,007
Property management fees	Monthly fee up to 4% of the monthly gross revenues of the properties managed	2,557		2,331		7,509		6,572
General and administrative expense fees	Monthly fee equal to 2% of the monthly gross revenues of the Company	1,557		1,560		4,624		4,528
Construction management fees	Quarterly fee for property renovation and takeover projects	73		93		208		366
Disposition fees	1% of the sale price of a real estate asset	—		425		16		860

		$	12,280	$	12,054	$	32,109	$	34,621

The Manager may, in its discretion, waive some or all of the asset management, property management, or general and administrative fees in the current period for properties owned by the Company. The waived fees may become earned by the Manager as an additional disposition fee only in the event of a sales transaction, and whereby the Company’s capital contributions for the property being sold exceed a 7% annual rate of return. The Company will recognize in future periods to the extent, if any, it determines that the sales transaction is probable, and that the estimated net sale proceeds would exceed the annual rate of return hurdle. A cumulative total of approximately $21.2 million of combined asset management and general and administrative fees related to acquired properties as of September 30, 2019 have been waived by the Manager. A total of $19.7 million remaining waived fees could possibly be earned by the Manager in the future.

In addition to property management fees, the Company incurred the following reimbursable on-site personnel salary and related benefits expenses at the properties, which are listed on the Consolidated Statements of Operations:



(In thousands)
Three-month periods ended September 30,				Nine-month periods ended September 30,
2019		2018		2019		2018
$	4,681	$	4,501	$	12,973	$	12,040

The Manager utilizes its own and its affiliates' personnel to accomplish certain tasks related to raising capital that would typically be performed by third parties, including, but not limited to, legal and marketing functions. As permitted under the Management Agreement, the Manager was reimbursed $384,243 and $357,807 for the nine-month periods ended September 30, 2019 and 2018,

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

respectively and Preferred Capital Securities, LLC, or PCS, was reimbursed $1,022,855 and $1,080,660 for the nine-month periods ended September 30, 2019 and 2018 , respectively. These costs are recorded as deferred offering costs until such time as additional closings occur on the 2019 Preferred Stock Offering, $1.5 Billion Unit Offering, mShares Offering or the 2019 Shelf Offering, at which time they are reclassified on a pro-rata basis as a reduction of offering proceeds within stockholders’ equity.

The Company pays its Manager leasing commission fees for office and retail leases based on varying rates and conditions.

The Company holds a promissory note in the amount of approximately $650,000 due from Preferred Capital Marketing Services, LLC, or PCMS, which is a wholly-owned subsidiary of NELL Partners.

The Company has extended a revolving line of credit with a maximum borrowing amount of $22.0 million to its Manager.

Of the Company’s $27.9 million accrued interest receivable on real estate loans balance on the Consolidated Balance Sheet, approximately $1.2 million relates to the Haven 12 real estate loan investment, which is to a related party. Interest receivable of approximately $375,000 on its Haven Campus Communities, LLC line of credit is included in the tenant receivables and other assets line.

7. Dividends and Distributions

The Company declares and pays monthly cash dividend distributions in the amount of $5.00 per share per month on its Series A Preferred Stock; on the Company's mShares, dividends accrue and are paid on an escalating scale of $4.79 per month in the first year following share issuance, increasing each year to $6.25 per month in year eight and beyond. Beginning in October 2019, the Company declares and pays monthly cash dividend distributions in the amount of $5.00 per share per month on its Series A1 Preferred Stock and on its Series M1 Preferred Stock, according to an escalating scale of $5.08 per month in year one, increasing to $5.92 per month in year ten and beyond. All preferred stock dividends are prorated for partial months at issuance as necessary.

The Company declared aggregate quarterly cash dividends on its Common Stock of $0.785 and $0.76 per share for the nine-month periods ended September 30, 2019 and 2018, respectively. The holders of Class A OP Units of the Operating Partnership are entitled to equivalent distributions as the dividends declared on the Common Stock. At September 30, 2019, the Company had 856,409 Class A OP Units outstanding, which are exchangeable on a one-for-one basis for shares of Common Stock or the equivalent amount of cash.

The Company's dividend and distribution activity consisted of:



	Dividends and distributions declared
	For the nine-month periods ended September 30,
	2019		2018
(In thousands)
Series A Preferred Stock	$	79,351	$	61,558
mShares	3,176		1,243
Common Stock	34,599		30,283
Class A OP Units	683		813

Total	$	117,809	$	93,897

8. Equity Compensation

Stock Incentive Plan

On May 2, 2019, the Company’s board of directors adopted, and the Company’s stockholders approved, the Preferred Apartment Communities, Inc. 2019 Stock Incentive Plan, or the 2019 Plan, to incentivize, compensate and retain eligible officers, consultants, and non-employee directors. The 2019 Plan increased the aggregate number of shares of Common Stock authorized for issuance under the 2011 Plan from 2,617,500 to 3,617,500. The 2019 Plan does not have a stated expiration date.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

Equity compensation expense by award type for the Company was:



	Three-month period ended September 30,				Nine-month period ended September 30,				Unamortized expense as of September 30,
(In thousands)	2019		2018		2019		2018		2019

Class B Unit awards:
2016	$	—	$	55	$	2	203		$	—
2017	78		68		234		263		81
2018	72		538		215		2,002		358
Restricted stock grants:
2017	—		—		—		120		—
2018	—		91		120		151		—
2019	106		—		176		—		245
Restricted stock units:
2017	15		19		53		62		17
2018	15		25		55		80		110
2019	19		—		67		—		200

Total	$	305	$	796	$	922	$	2,881	$	1,011

Restricted Stock Grants

The following annual grants of restricted stock were made to members of the Company's independent directors, as payment of the annual retainer fees. The restricted stock grants vested (or are scheduled to vest) on a pro-rata basis over the four consecutive 90-day periods following the date of grant.



Service year	Shares	Fair value per share		Total compensation cost (in thousands)
2017	24,408	$	14.75	$	360
2018	24,810	$	14.51	$	360
2019	26,446	$	15.88	$	420

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

Class B OP Units

As of September 30, 2019, cumulative activity of grants of Class B Units of the Operating Partnership, or Class B OP units, was:



	Grant date
	1/2/2018		1/3/2017

Units granted	256,087		286,392
Units forfeited:
John A. Williams ⁽¹⁾	(38,284	)	—
Voluntary forfeiture by senior executives	(128,258	)	—
Other	(22,722	)	(5,334	)

Total forfeitures	(189,264	)	(5,334	)

Units earned and converted into Class A Units	—		(254,730	)

Class B Units outstanding at September 30, 2019	66,823		26,328

Units unearned but vested	32,575		—
Units unearned and not yet vested	34,248		26,328

Class B Units outstanding at September 30, 2019	66,823		26,328

⁽¹⁾Pro rata modification of award on April 16, 2018, the date of Mr. Williams' passing.

There were no grants of Class B OP Units for 2019.

The underlying valuation assumptions and results for the 2018 Class B OP Unit awards were:



Grant dates	1/2/2018
Stock price	$	20.19
Dividend yield	4.95		%
Expected volatility	25.70		%
Risk-free interest rate	2.71		%

Number of Units granted:
One year vesting period	171,988
Three year vesting period	84,099
	256,087

Calculated fair value per Unit	$	16.66

Total fair value of Units	$	4,266,409

Target market threshold increase	$	5,660,580

The expected dividend yield assumptions were derived from the Company’s closing prices of the Common Stock on the grant dates and the projected future quarterly dividend payments per share of $0.25 for the 2018 awards.

For the 2018 awards, the Company's own stock price history was utilized as the basis for deriving the expected volatility assumption.

The risk-free rate assumptions were obtained from the Federal Reserve yield table and were calculated as the interpolated rate between the 20 and 30 year yield percentages on U. S. Treasury securities on the grant date.

Since the Class B OP Units have no expiration date, a derived service period of one year was utilized, which equals the period of time from the grant date to the initial valuation date.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

Restricted Stock Units

The Company, through its Operating Partnership, has granted restricted stock units, or RSUs, to certain employees of affiliates of the Company, as shown in the following table:



Grant date	1/2/2019			1/2/2018			1/3/2017
Service period	2019-2021			2018-2020			2017-2019

RSU activity:
Granted	27,760			20,720			26,900
Forfeited	(2,960		)	(4,760		)	(6,971		)
Units earned and converted into common stock	—			—			(14,154		)

RSUs outstanding at September 30, 2019	24,800			15,960			5,775

RSUs unearned but vested	—			5,345			—
RSUs unearned but not yet vested	24,800			10,615			5,775

RSUs outstanding at September 30, 2019	24,800			15,960			5,775

Fair value per RSU	$	10.77		$	16.66		$	11.92
Total fair value of RSU grant	$	298,975		$	345,195		$	320,648

The RSUs vest in three equal consecutive one-year tranches from the date of grant. For each grant, on the Initial Valuation Date, the market capitalization of the number of shares of Common Stock at the date of grant is compared to the market capitalization of the same number of shares of Common Stock at the Initial Valuation Date. If the market capitalization measure results in an increase which exceeds the target market threshold, the Vested RSUs become earned RSUs and automatically convert into Common Stock on a one-to-one basis. Vested RSUs may become Earned RSUs on a pro-rata basis should the result of the market capitalization test be an increase of less than the target market threshold. Any Vested RSUs that do not become Earned RSUs on the Initial Valuation Date are subsequently remeasured on a quarterly basis until such time as all Vested RSUs become Earned RSUs or are forfeited due to termination of continuous service due to an event other than as a result of a qualified event, which is generally the death or disability of the holder. Continuous service through the final valuation date is required for the Vested RSUs to qualify to become fully Earned RSUs.

Because RSUs are valued using the identical market condition vesting requirement that determines the transition of the Vested Class B Units to Earned Class B Units, the same valuation assumptions per RSU were utilized to calculate the total fair values of the RSUs. The total fair value amounts pertaining to grants of RSUs, net of forfeitures, are amortized as compensation expense over the three one-year periods ending on the three successive anniversaries of the grant dates.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

9. Indebtedness

Mortgage Notes Payable

Mortgage financing of property acquisitions

The Company partially financed the real estate properties acquired during the nine-month period ended September 30, 2019 with mortgage debt as shown in the following table (see note 16):

Property

Date

Initial principal amount

(in thousands)

Fixed/Variable rate

Rate

Maturity date

Fairfield Shopping Center

8/16/2019

19,750

Variable

1 month LIBOR + 205

8/16/2026

Artisan at Viera

8/8/2019

40,000

Fixed

3.93

9/1/2029

CAPTRUST Tower

7/25/2019

82,650

Fixed

3.61

8/1/2029

Disston Plaza

6/12/2019

18,038

Fixed

3.93

7/1/2034

Polo Grounds Mall

6/12/2019

13,325

Fixed

3.93

7/1/2034

Free State Shopping Center

5/28/2019

46,800

Fixed

3.99

6/1/2029

Haven49⁽¹⁾

3/27/2019

41,550

Variable

1 month LIBOR + 375

12/22/2019

Gayton Crossing

1/17/2019

18,000

Fixed

4.71

2/1/2029

280,113

⁽¹⁾The Company assumed the existing construction loan on this property.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

Repayments and refinancings

The following table summarizes our mortgage debt refinancing and repayment activity for the nine-month periods ended September 30, 2019:



Date	Property	Previous balance (millions)		Previous interest rate / spread over 1 month LIBOR		Loan refinancing costs expensed		New balance (millions)		New interest rate		Total deferred loan costs subsequent to refinancing
9/17/2019	Spring Hill Plaza	$	9.1	3.36	%	$	—	$	8.2	3.72	%	$	195,000
9/17/2019	Parkway Town Centre	6.6		3.36	%	—		8.1		3.72	%	195,000
8/16/2019	Deltona Landings	6.5		3.48	%	5,000		6.3		4.18	%	204,000
8/16/2019	Barclay Crossing	6.1		3.48	%	4,000		6.3		4.18	%	209,000
8/16/2019	Parkway Center	4.3		3.48	%	3,000		4.6		4.18	%	148,000
8/13/2019	Powder Springs	6.9		3.48	%	4,000		8.0		3.65	%	236,000
7/29/2019	Citi Lakes	41.1		L + 217		155,000		41.3		3.66	%	668,000
4/12/2019	Royal Lakes Marketplace	9.5		L + 250		52,000		9.7		4.29	%	287,000
4/12/2019	Cherokee Plaza	24.5		L + 225		317,000		25.2		4.28	%	723,000
2/28/2019	Lenox Village Town Center	29.2		3.82	%	17,000		39.3		4.34	%	1,153,000

		$	143.8			$	557,000	$	157.0			$	4,018,000

9/28/2018	Stone Rise	$	23.5	2.89	%	$	119,000	$	—	N/A		$	—
3/29/2018	Sol	37.5		L + 200		41,000		37.5		4.71	%	649,000
3/20/2018	Lake Cameron	19.7		3.13	%	402,000		—		N/A		—

		$	80.7			$	562,000	$	37.5			$	649,000

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

The following table summarizes our mortgage notes payable at September 30, 2019:



(In thousands)
Fixed rate mortgage debt:	Principal balances due			Weighted-average interest rate		Weighted average remaining life (years)
Multifamily communities	$	1,108,840		3.91	%	9.2
New Market Properties	551,371			3.97	%	8.0
Preferred Office Properties	566,344			4.22	%	13.7
Student housing properties	159,780			4.13	%	5.8

Total fixed rate mortgage debt	2,386,335			4.01	%	9.8

Variable rate mortgage debt:
Multifamily communities	39,078			3.62	%	4.8
New Market Properties	47,150			4.68	%	4.1
Preferred Office Properties	—			—		—
Student housing properties	131,916			5.55	%	1.0

Total variable rate mortgage debt	218,144			5.01	%	2.3

Total mortgage debt:
Multifamily communities	1,147,918			3.90	%	9.1
New Market Properties	598,521			4.02	%	7.7
Preferred Office Properties	566,344			4.22	%	13.7
Student housing properties	291,696			4.77	%	3.6

Total principal amount	2,604,479			4.09	%	9.2
Deferred loan costs	(37,954		)
Mark to market loan adjustment	(4,688		)
Mortgage notes payable, net	$	2,561,837

The Company has placed an interest rate cap on the variable rate mortgage on its Avenues at Creekside multifamily community. Under guidance provided by ASC 815-10, this interest rate cap is a derivative, that is embedded in its debt host. Because the interest rate cap is deemed to be clearly and closely related to its debt host, bifurcation and fair value accounting treatment is not required.

The mortgage note secured by our Independence Square property is a seven year term with an anticipated repayment date of September 1, 2022. If the Company elects not to pay its principal balance at the anticipated repayment date, the term will be extended for an additional five years, maturing on September 1, 2027. The interest rate from September 1, 2022 to September 1, 2027 will be the greater of (i) the Initial Interest Rate of 3.93% plus 200 basis points or (ii) the yield on the seven year U.S. treasury security rate plus approximately 400 basis points.

As of September 30, 2019, the weighted-average remaining life of deferred loan costs related to the Company's mortgage indebtedness was approximately 9.6 years. Our mortgage notes have maturity dates between October 1, 2019 and June 1, 2054.

Credit Facility

The Company has a credit facility, or Credit Facility, with KeyBank National Association, or KeyBank, which defines a revolving line of credit, or Revolving Line of Credit, which is used to fund investments, capital expenditures, dividends (with consent of KeyBank), working capital and other general corporate purposes on an as needed basis. On March 23, 2018, the maximum borrowing capacity on the Revolving Line of Credit was increased to $200 million pursuant to an accordion feature. The accordion feature

permits the maximum borrowing capacity to be expanded or contracted without amending any further terms of the instrument. On December 12, 2018, the Fourth Amended and Restated Credit Agreement, or the Amended and Restated Credit Agreement,

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

was amended to extend the maturity to December 12, 2021, with an option to extend the maturity date to December 12, 2022, subject to certain conditions described therein. The Revolving Line of Credit accrues interest at a variable rate of one month LIBOR plus an applicable margin of 2.75% to 3.50% per annum, depending upon the Company’s leverage ratio. The weighted average interest rate for the Revolving Line of Credit was 5.53% for the nine-month period ended September 30, 2019. The Amended and Restated Credit Agreement also reduced the commitment fee on the average daily unused portion of the Revolving Line of Credit to 0.25% or 0.30% per annum, depending upon the Company’s outstanding Credit Facility balance.

On May 26, 2016, the Company entered into a $11.0 million interim term loan with KeyBank, or the Interim Term Loan, to partially finance the acquisition of Anderson Central, a grocery-anchored shopping center located in Anderson, South Carolina. The Interim Term Loan accrued interest at a rate of LIBOR plus 2.5% per annum until it was repaid and extinguished during the first quarter of 2018.

The Fourth Amended and Restated Credit Agreement contains certain affirmative and negative covenants, including negative covenants that limit or restrict secured and unsecured indebtedness, mergers and fundamental changes, investments and acquisitions, liens and encumbrances, dividends, transactions with affiliates, burdensome agreements, changes in fiscal year and other matters customarily restricted in such agreements. The amount of dividends that may be paid out by the Company is restricted to a maximum of 95% of AFFO for the trailing four quarters without the lender's consent; solely for purposes of this covenant, AFFO is calculated as earnings before interest, taxes, depreciation and amortization expense, plus reserves for capital expenditures, less normally recurring capital expenditures, less consolidated interest expense.

As of September 30, 2019, the Company was in compliance with all covenants related to the Revolving Line of Credit, as shown in the following table:



Covenant ⁽¹⁾	Requirement		Result
Net worth	Minimum $1.8 billion	₍₂₎	$1.9 billion
Debt yield	Minimum 8.25%		9.99%
Payout ratio	Maximum 95%	₍₃₎	93.9%
Total leverage ratio	Maximum 65%		56.8%
Debt service coverage ratio	Minimum 1.50x		1.75x

⁽¹⁾All covenants are as defined in the credit agreement for the Revolving Line of Credit.

⁽²⁾Minimum of $686.9 million plus 75% of the net proceeds of any equity offering, which totaled approximately $1.1 billion as of September 30, 2019.

⁽³⁾Calculated on a trailing four-quarter basis. For the twelve-month period ended September 30, 2019, the maximum dividends and distributions allowed under this covenant was approximately $154.7 million.

Loan fees and closing costs for the establishment and subsequent amendments of the Credit Facility are amortized utilizing the straight line method over the life of the Credit Facility. At September 30, 2019, unamortized loan fees and closing costs for the Credit Facility were approximately $1.3 million, which will be amortized over a remaining loan life of approximately 2.3 years. Loan fees and closing costs for the mortgage debt on the Company's properties are amortized utilizing the effective interest rate method over the lives of the loans.

Acquisition Facility

On February 28, 2017, the Company entered into a credit agreement, or Acquisition Credit Agreement, with Freddie Mac through KeyBank to obtain an acquisition revolving credit facility, or Acquisition Facility, with a maximum borrowing capacity of $200 million. The purpose of the Acquisition Facility is to finance acquisitions of multifamily communities and student housing communities. The maximum borrowing capacity on the Acquisition Facility may be increased at the Company's request up to $300 million at any time prior to March 1, 2021. On March 25, 2019, the maximum borrowing capacity was decreased to $90 million by agreement between the Company and KeyBank.The Acquisition Facility accrues interest at a variable rate of one month LIBOR plus a margin of between 1.75% per annum and 2.20% per annum, depending on the type of assets acquired and the resulting property debt service coverage ratio. The Acquisition Facility has a maturity date of March 1, 2022 and has two one-year extension options, subject to certain conditions described therein. At September 30, 2019, unamortized loan fees and closing costs for the establishment of the Acquisition Facility were approximately $0.2 million, which will be amortized over a remaining loan life of approximately 2.4 years.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

Interest Expense

Interest expense, including amortization of deferred loan costs was:



	Three-month periods ended September 30,				Nine-month periods ended September 30,
(In thousands)	2019		2018		2019		2018

Multifamily communities	$	12,162	$	11,409	$	35,434	$	33,597
New Market Properties	6,422		5,071		18,123		14,056
Preferred Office Properties	5,909		3,489		16,617		8,696
Student housing properties	3,946		3,497		11,295		7,572
Interest paid to real estate loan participants	—		802		110		1,746

Total	28,439		24,268		81,579		65,667

Credit Facility and Acquisition Facility	360		1,389		1,587		3,305
Interest Expense	$	28,799	$	25,657	$	83,166	$	68,972

Future Principal Payments

The Company’s estimated future principal payments due on its debt instruments as of September 30, 2019 were:



Period	Future principal payments (in thousands)
2019	$	120,117	₍₁₎
2020	74,674
2021	181,018
2022	220,992
2023	159,036
Thereafter	1,898,642

Total	$	2,654,479

⁽¹⁾Includes the outstanding principal amount of $50.0 million on the Company's revolving line of credit.

10. Income Taxes

The Company elected to be taxed as a REIT effective with its tax year ended December 31, 2011, and therefore, the Company will not be subject to federal and state income taxes, so long as it distributes 100% of the Company's annual REIT taxable income (which does not equal net income as calculated in accordance with GAAP and determined without regard for the deduction for dividends paid and excluding net capital gains) to its stockholders. For the Company's tax years prior to its REIT election year, its operations resulted in a tax loss. As of December 31, 2010, the Company had deferred federal and state tax assets totaling approximately $298,100, none of which were based upon tax positions deemed to be uncertain. These deferred tax assets will most likely not be used since the Company elected REIT status; therefore, management has determined that a 100% valuation allowance is appropriate as of September 30, 2019 and December 31, 2018.

11. Commitments and Contingencies

On March 28, 2014, the Company entered into a payment guaranty in support of its Manager's eleven-year office lease, which began on October 9, 2014. As of September 30, 2019, the amount guarantied by the Company was $5.5 million and is reduced by $619,304 per lease year over the term of the lease.

Certain officers and employees of the Manager have been assigned company credit cards. As of September 30, 2019, the Company guarantied up to $640,000 on these credit cards.

The Company is otherwise currently subject to neither any known material commitments or contingencies from its business operations, nor any material known or threatened litigation.

A total of approximately $21.2 million of asset management and general and administrative fees related to acquired properties as of September 30, 2019 have been waived by the Manager. The waived fees are converted at the time of waiver into contingent fees, which are earned by the Manager as an additional disposition fee only in the event of a sales transaction, and whereby the Company’s capital contributions for the property being sold exceed a 7% annual rate of return. The Company will recognize in future periods to the extent, if any, it determines that the sales transaction is probable, and that the estimated net sale proceeds would exceed the annual rate of return hurdle. As of September 30, 2019, a total of $19.7 million remaining waived fees could possibly be earned by the Manager in the future.

At September 30, 2019, the Company had unfunded balances on its real estate loan portfolio of approximately $74.7 million.

At September 30, 2019, the Company had unfunded contractual commitments for tenant, leasing, and capital improvements of approximately $15.1 million.

12. Operating Leases

The Company’s grocery-anchored shopping centers and office properties are leased to tenants under operating leases for which the terms vary. The future minimum rental income due under the remaining terms of the Company's operating leases in place, excluding tenant reimbursements of operating expenses and real estate taxes and additional percentage rent based on tenants’ sales volumes, as of September 30, 2019, is presented below, assuming that all leases which expire are not renewed and tenant renewal options are not exercised (excludes rental income due from tenants of multifamily communities, which are of lease terms of twelve months or less):



For the year ending December 31:	Future Minimum Rents as of September 30, 2019
(In thousands)	New Market Properties		Preferred Office Properties		Total

2019 ⁽¹⁾	$	18,295	$	16,728	$	35,023
2020	70,420		71,934		142,354
2021	62,035		71,636		133,671
2022	52,462		70,030		122,492
2023	44,366		68,602		112,968
Thereafter	134,191		362,308		496,499
Total	$	381,769	$	661,238	$	1,043,007

⁽¹⁾Remaining three months



For the year ending December 31:	Future Minimum Rents as of December 31, 2018
(In thousands)	New Market Properties		Preferred Office Properties		Total

2019	$	58,143	$	56,564	$	114,707
2020	51,949		61,704		113,653
2021	43,152		58,805		101,957
2022	35,218		58,108		93,326
2023	29,562		57,343		86,905
Thereafter	79,747		298,469		378,216
Total	$	297,771	$	590,993	$	888,764

The Company’s grocery-anchored shopping centers are geographically concentrated within the Sunbelt and Mid-Atlantic region of the United States. The Company’s retail tenant base primarily consists of national and regional supermarkets, consumer services, healthcare providers, and restaurants. Our grocery anchor tenants comprise approximately 44.9% of our gross leasable area. Our

credit risk, therefore, is concentrated in the retail/grocery real estate sector. Amounts required as security deposits vary depending upon the terms of the respective leases and the creditworthiness of the tenant, with the exception of our grocer anchor tenants, who generally are not required to provide security deposits. Exposure to credit risk is limited to the extent that tenant receivables exceed security deposits. Security deposits related to tenant leases are included in security deposits and other liabilities in the accompanying consolidated balance sheets.

As of September 30, 2019, the Company’s approximately 2.9 million square foot office portfolio was 97% leased to a predominantly investment grade credit (or investment grade equivalent) tenant roster. For non-credit tenants, our leases typically require a security deposit or letter of credit, which limits worst case collection exposure to amounts in excess of those protections. Additionally, some credit tenant leases will include credit enhancement provisions that require a security deposit or letter of credit in the event of a rating downgrade. We conduct thorough credit analyses not only for leasing activities within our existing portfolio but also for major tenants in properties we are considering acquiring.

13. Segment Information

The Company's Chief Operating Decision Maker, or CODM, evaluates the performance of the Company's business operations and allocates financial and other resources by assessing the financial results and outlook for future performance across five distinct segments: multifamily communities, student housing properties, real estate related financing, New Market Properties and Preferred Office Properties.

Multifamily Communities - consists of the Company's portfolio of owned residential multifamily communities

Student Housing Properties - consists of the Company's portfolio of owned student housing properties.

Financing - consists of the Company's portfolio of real estate loans, bridge loans, and other instruments deployed by the Company to partially finance the development, construction, and prestabilization carrying costs of new multifamily communities and other real estate and real estate related assets. Excluded from the financing segment are consolidated assets of VIEs and financial results of the Company's Dawson Marketplace grocery-anchored shopping center real estate loan, which are included in the New Market Properties segment.

New Market Properties - consists of the Company's portfolio of grocery-anchored shopping centers, which are owned by New Market Properties, LLC, a wholly-owned subsidiary of the Company, as well as the financial results from the Company's grocery-anchored shopping center real estate loans.

Preferred Office Properties - consists of the Company's portfolio of office buildings.

The CODM monitors net operating income (“NOI”) on a segment and a consolidated basis as a key performance measure for its operating segments. NOI is a non-GAAP measure that is defined as rental and other property revenue from real estate assets plus interest income from its loan portfolio less total property operating and maintenance expenses, property management fees, real estate taxes, property insurance, and general and administrative expenses. The CODM uses NOI as a measure of operating performance because it provides a measure of the core operations, rather than factoring in depreciation and amortization, financing costs, acquisition expenses, and other expenses generally incurred at the corporate level.

The following tables present the Company's assets, revenues, and NOI results by reportable segment, as well as a reconciliation from NOI to net income (loss). The assets attributable to 'Other' primarily consist of deferred offering costs recorded but not yet reclassified as reductions of stockholders' equity and cash balances at the Company and Operating Partnership levels.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)



(In thousands)	September 30, 2019		December 31, 2018

Assets:
Multifamily communities	$	1,586,795	$	1,503,648
Student housing properties	494,847		411,102
Financing	518,947		448,617
New Market Properties	1,053,920		883,594
Preferred Office Properties	1,012,889		884,648
Other ⁽¹⁾	600,249		279,349
Consolidated assets	$	5,267,647	$	4,410,958

⁽¹⁾Other Assets includes $585,837 and $264,886 of assets owned by other pool participants within the Freddie Mac K Program that were consolidated by the Company. The Company's maximum exposure to loss from the combined mortgage pools from the Freddie Mac K Program is approximately $24.4 million.

Total capitalized expenditures (inclusive of additions to construction in progress, but exclusive of the purchase price of acquisitions) for the three-month and nine-month periods ended September 30, 2019 and 2018 were as follows:



	Three-month periods ended September 30,				Nine-month periods ended September 30,
(In thousands)	2019		2018		2019		2018

Capitalized expenditures:
Multifamily communities	$	3,412	$	3,452	$	8,257	$	14,150
Student housing properties	1,297		1,061		3,120		2,269
New Market Properties	2,699		3,163		5,703		4,950
Total	$	7,408	$	7,676	$	17,080	$	21,369

Second-generation capital expenditures exclude those expenditures made in our office building portfolio (i) to lease space to "first generation" tenants (i.e. leasing capital for existing vacancies and known move-outs at the time of acquisition), (ii) to bring recently acquired properties up to our Class A ownership standards (and which amounts were underwritten into the total investment at the time of acquisition), (iii) for property redevelopments and repositionings (iv) to newly leased space which had been vacant for more than one year and (v) for building improvements that are recoverable from future operating cost savings.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

Total revenues by reportable segment of the Company were:



	Three-month periods ended September 30,				Nine-month periods ended September 30,
(In thousands)	2019		2018		2019		2018
Revenues

Rental revenues:
Multifamily communities	$	41,999	$	39,515	$	123,161	$	117,273
Student housing properties	11,887		9,719		33,344		22,485
New Market Properties	24,654		19,303		68,529		54,209
Preferred Office Properties ⁽¹⁾	23,277		15,963		64,613		41,347
Total rental revenues	101,817		84,500		289,647		235,314

Other revenues:
Multifamily communities	1,565		1,480		4,205		4,209
Student housing properties	555		366		959		556
New Market Properties	616		703		1,682		1,924
Preferred Office Properties	939		401		3,393		607
Total other revenues	3,675		2,950		10,239		7,296

Financing revenues	14,711		16,782		44,652		48,381
Miscellaneous revenues	—		—		1,023		—
Consolidated revenues	$	120,203	$	104,232	$	345,561	$	290,991

(1) Included in rental revenues for our Preferred Office Properties segment is the amortization of deferred revenue for tenant-funded leasehold improvements from a major tenant in our Three Ravinia and Westridge office buildings. As of September 30, 2019, the Company has deferred revenue in an aggregate amount of $47 million in connection with such improvements. The remaining balance to be recognized is approximately $40.7 million which is included in the deferred revenues line on the consolidated balance sheets at September 30, 2019. These total costs will be amortized over the lesser of the useful lives of the improvements or the individual lease terms. The Company recorded non-cash revenue of approximately $2.8 million and $1.8 million for the nine-month periods ended September 30, 2019 and 2018, respectively.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)



	Three-month periods ended September 30,					Nine-month periods ended September 30,
(In thousands)	2019			2018		2019			2018
Segment net operating income (Segment NOI)

Multifamily communities	$	24,824		$	23,073	$	73,178		$	69,342
Student housing properties	5,371			3,985		17,613			10,927
Financing	14,710			16,782		44,675			48,381
New Market Properties	18,070			14,521		50,299			40,005
Preferred Office Properties	17,138			11,267		48,458			29,663

Consolidated segment net operating income	80,113			69,628		234,223			198,318

Interest expense:
Multifamily communities	12,162			11,409		35,434			33,597
Student housing properties	3,946			3,497		11,295			7,572
New Market Properties	6,422			5,071		18,123			14,056
Preferred Office Properties	5,909			3,489		16,617			8,696
Financing	360			2,191		1,697			5,051
Depreciation and amortization:
Multifamily communities	18,647			18,802		57,449			60,825
Student housing properties	5,222			7,135		16,855			19,736
New Market Properties	11,677			10,462		32,644			28,519
Preferred Office Properties	10,693			8,100		30,243			18,130
Professional fees	1,575			560		3,349			1,803
Management fees, net of forfeitures	5,530			5,300		16,144			15,513
Loan loss allowance	—			3,029		—			3,029
Equity compensation to directors and executives	305			796		922			2,881
Gain on sale of real estate	—			18,605		—			38,961
Gain on non-cash net assets of consolidated VIEs	591			131		1,316			185
Gain loss on sale of real estate loan investment	—			—		747			—
Loss on extinguishment of debt	15			—		84			—
Gain on trading investment, net	—			—		4			—
Other	378			169		1,528			717

Net income (loss)	$	(2,137	)	$	8,354	$	(6,094	)	$	17,339

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

14. Income (Loss) Per Share

The following is a reconciliation of weighted average basic and diluted shares outstanding used in the calculation of income (loss) per share of Common Stock:



		Three-month periods ended September 30,						Nine-month periods ended September 30,
	(In thousands, except per-share figures)	2019			2018			2019			2018
Numerator:
	Operating income before gains on sales of real estate and trading investment	$	26,086		$	15,275		$	75,089		$	47,165
	Gains on sales of real estate and trading investment	—			18,605			4			38,961

	Operating income	26,086			33,880			75,093			86,126
	Interest expense	28,799			25,657			83,166			68,972
	Change in fair value of net assets of consolidated VIEs from mortgage-backed pools	591			131			1,316			185
	Loss on extinguishment of debt	(15		)	—			(84		)	—
	Gain on sale of real estate loan investment	—			—			747			—

	Net (loss) income	(2,137		)	8,354			(6,094		)	17,339
	Consolidated net loss (income) attributable to non-controlling interests	59			(216		)	138			(456		)

	Net (loss) income attributable to the Company	(2,078		)	8,138			(5,956		)	16,883

	Dividends declared to preferred stockholders	(29,446		)	(22,360		)	(82,527		)	(62,801		)
	Earnings attributable to unvested restricted stock	(5		)	(5		)	(14		)	(13		)

	Net loss attributable to common stockholders	$	(31,529	)	$	(14,227	)	$	(88,497	)	$	(45,931	)

Denominator:
	Weighted average number of shares of Common Stock - basic	44,703			40,300			43,703			39,598

	Effect of dilutive securities: ^(D)	—			—			—			—

	Weighted average number of shares of Common Stock - basic and diluted	44,703			40,300			43,703			39,598

	Net loss per share of Common Stock attributable to
	common stockholders, basic and diluted	$	(0.71	)	$	(0.35	)	$	(2.02	)	$	(1.16	)

^(A) The Company's outstanding Class A Units of the Operating Partnership (856 and 1,068 Units at September 30, 2019 and 2018, respectively) contain rights to distributions in the same amount per unit as for dividends declared on the Company's Common Stock. The impact of the Class A Unit distributions on earnings per share has been calculated using the two-class method whereby earnings are allocated to the Class A Units based on dividends declared and the Class A Units' participation rights in undistributed earnings.

^(B)The Company’s shares of Series A Preferred Stock outstanding accrue dividends at an annual rate of 6% of the stated value of $1,000 per share, payable monthly. The Company had 1,932 and 1,508 outstanding shares of Series A Preferred Stock at September 30, 2019 and 2018, respectively. The Company's shares of Series M preferred stock, or mShares, accrue dividends at an escalating rate of 5.75% in year one to 7.50% in year eight and thereafter. The Company had 90 and 37 mShares outstanding at September 30, 2019 and 2018, respectively.

^(C) The Company's outstanding unvested restricted share awards (20 and 19 shares of Common Stock at September 30, 2019 and 2018, respectively) contain non-forfeitable rights to distributions or distribution equivalents. The impact of the unvested restricted share awards on earnings per share has been calculated using the two-class method whereby earnings are allocated to the unvested restricted share awards based on dividends declared and the unvested restricted shares' participation rights in undistributed earnings. Given the Company's unvested restricted share awards are defined as participating securities, the dividends declared for that period are adjusted in determining the calculation of loss per share of Common Stock.

^(D) Potential dilution from (i) warrants outstanding from issuances of Units from our Series A Preferred Stock offerings that are potentially exercisable into 29,098 shares of Common Stock; (ii) 93 Class B Units; (iii) 20 shares of unvested restricted common stock; and (iv) 46,535 outstanding Restricted Stock Units are excluded from the diluted shares calculations because the effect was antidilutive. Class A Units were excluded from the denominator because earnings were allocated to non-controlling interests in the calculation of the numerator.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

15. Fair Values of Financial Instruments

Fair value is defined as the price at which an asset or liability is exchanged between market participants in an orderly transaction at the reporting date. The Company’s cash equivalents, notes receivable, accounts receivable and payables and accrued expenses all approximate fair value due to their short term nature.

The following tables provide estimated fair values of the Company’s financial instruments. The carrying values of the Company's real estate loans include accrued interest receivable from additional interest or exit fee provisions and are presented net of deferred loan fee revenue, where applicable.



	As of September 30, 2019
	Carrying value				Fair value measurements using fair value hierarchy
(In thousands)	Carrying value		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Real estate loans	$	381,486	$	415,909	$	—	$	—	$	415,909
Notes receivable and line of credit receivable	41,657		41,657		—		—		41,657
	$	423,143	$	457,566	$	—	$	—	$	457,566
Financial Liabilities:
Mortgage notes payable	$	2,604,479	$	2,656,937	$	—	$	—	$	2,656,937
Revolving line of credit	50,000		50,000		—		—		50,000
	$	2,654,479	$	2,706,937	$	—	$	—	$	2,706,937



	As of December 31, 2018
	Carrying value				Fair value measurements using fair value hierarchy
(In thousands)	Carrying value		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Real estate loans ⁽¹⁾	$	334,211	$	366,328	$	—	$	—	$	366,328
Notes receivable and line of credit receivable	47,307		47,307		—		—		47,307
	$	381,518	$	413,635	$	—	$	—	$	413,635
Financial Liabilities:
Mortgage notes payable	$	2,339,752	2,313,405		$	—	$	—	$	2,313,405
Revolving credit facility	57,000		57,000		—		—		57,000
Loan participation obligations	5,181		5,181		—		—		5,181
	$	2,401,933	$	2,375,586	$	—	$	—	$	2,375,586

⁽¹⁾ The carrying value of real estate assets at December 31, 2018 included the Company's balance of the Palisades real estate loan investment, which included the amounts funded by an unrelated participant. On March 13, 2019, the Company repurchased the loan participant's 25% balance in the loan from the loan participant and at September 30, 2019, carried the entire loan balance on its consolidated balance sheet without reflection of any liability to any third party.

The fair value of the real estate loans within the level 3 hierarchy are comprised of estimates of the fair value of the notes, which were developed utilizing a discounted cash flow model over the remaining terms of the notes until their maturity dates and utilizing discount rates believed to approximate the market risk factor for notes of similar type and duration. The fair values also contain a separately-calculated estimate of any applicable additional interest payment due the Company at the maturity date of the loan,

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

based on the outstanding loan balances at September 30, 2019, discounted to the reporting date utilizing a discount rate believed to be appropriate for multifamily development projects.

The fair values of the fixed rate mortgages on the Company’s properties were developed using market quotes of the fixed rate yield index and spread for 4, 5, 6, 7, 10, 15, 25 and 35 year notes as of the reporting date. The present values of the cash flows were calculated using the original interest rate in place on the fixed rate mortgages and again at the current market rate. The difference between the two results was applied as a fair market adjustment to the carrying value of the mortgages.

The following table presents activity of the two mortgage pools from the Freddie Mac K Program as of and for the nine-month period ended September 30, 2019:



	Assets			Liabilities
(In thousands)	Multifamily mortgage loans held in VIEs at fair value			VIE liabilities, at fair value			Net
Balance as of December 31, 2018	$	269,946		$	264,886		$	5,060
Initial consolidation of ML-05 trust:	289,325			270,670			18,655
Gains (losses) included in net income due to change in fair value of net assets of VIE:	56,001			55,305			696
Repayments of underlying mortgage principal amounts and repayments to Class A holders:	(5,024		)	(5,024		)	—
Balance as of September 30, 2019	$	610,248		$	585,837		$	24,411

The changes in the fair value of the net assets of consolidated VIEs from mortgage-backed pools were:



	Three months ended				Nine months ended
	September 30,				September 30,
(In thousands)	2019		2018		2019		2018

Interest earned	$	310	$	—	$	620	$	—
Unrealized gain	281		131		696		185
Change in fair value of net assets of consolidated VIEs from mortgage-backed pools	$	591	$	131	$	1,316	$	185

The following table presents the level 3 input used to calculate the fair value of the consolidated assets and liabilities of the two VIEs:



(In thousands)	Fair value		Valuation methodology	Unobservable input
Assets:
Multifamily mortgage loans held in VIEs at fair value	$	610,248	Discounted cash flow	Discount rate	3.6	%
Liabilities:
VIE liabilities, at fair value	$	585,837	Discounted cash flow	Discount rate	3.6	%

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

The following tables present the estimated fair values of the consolidated assets and liabilities from the two VIEs for which the Company has elected the fair value option.



	As of September 30, 2019
	Carrying value				Fair value measurements using fair value hierarchy
(In thousands)	Carrying value		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
VIE assets from mortgage-backed pools	$	610,248	$	610,248	$	—	$	—	$	610,248
Financial Liabilities:
VIE liabilities from mortgage-backed pools	$	585,837	$	585,837	$	—	$	—	$	585,837



	December 31, 2018
	Carrying value				Fair value measurements using fair value hierarchy
(In thousands)	Carrying value		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
VIE assets from mortgage-backed pools	$	269,946	$	269,946	$	—	$	—	$	269,946
Financial Liabilities:
VIE liabilities from mortgage-backed pools	$	264,886	$	264,886	$	—	$	—	$	264,886

Disclosure guidance under GAAP requires the Company to determine whether the fair value of the financial assets or the fair value of the financial liabilities of the mortgage pools is more observable. The VIE assets within the two mortgage pools consist of mortgage loans which finance 40 and 20 multifamily communities at September 30, 2019 and December 31, 2018, respectively. The fair value of the VIE assets within the level 3 hierarchy are comprised of the fair value of the mortgages as estimated by the Company, which were developed utilizing a discounted cash flow model over the remaining terms of the mortgages until their maturity dates and utilizing discount rates believed to approximate the market risk factor for instruments of similar type and duration. The fair values of the notes are categorized within the level 3 hierarchy of fair value estimation as the discount rate primary input assumption is unobservable.

16. Subsequent Events

Between October 1, 2019 and October 31, 2019, the Company issued 42,025 Units under its $1.5 Billion Unit Offering and collected net proceeds of approximately $37.8 million after commissions and fees and issued 7,463 shares of Series M Preferred Stock under the mShares Offering and collected net proceeds of approximately $7.2 million after fees.

On October 11, 2019, the Company closed on a real estate loan investment of up to approximately $10.9 million in connection with the development of a 340-unit multifamily community to be located in Orlando, Florida.

On October 14, 2019, the Company announced that its Board of Directors had unanimously elected Joel T. Murphy as Chief Executive Officer, effective as of January 1, 2020. Mr. Murphy will continue as a member of the board, where he has served since May 2019. Mr. Murphy currently is, and has for the last five years been, the CEO of the Company's New Market Properties subsidiary, and since June 2018 has been the chairman of the Company's investment committee. Mr. Murphy succeeds the Company's current CEO and Chairman of the Board, Daniel M. DuPree, who will remain as Executive Chairman of the Board.

On October 16, 2019, the borrowers repaid all amounts due under the 464 Bishop real estate loan investment and the Newport Development Partners, LLC revolving line of credit held by the Company. On October 24, 2019, the borrower repaid all amounts due under the Park 35 on Clairmont real estate loan investment held by the Company. Included in the repayments were accrued interest amounts that totaled approximately $3.4 million.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2019

(unaudited)

On October 17, 2019, the Company closed on mortgage financing for its Five Oaks at Westchase multifamily community located in Tampa, Florida. The new mortgage has a principal amount of $31.5 million, bears interest at a fixed rate of 3.27% per annum and matures on November 1, 2031.

On October 30, 2019, the Company amended the purchase and sale agreement for the sale of six of its student housing properties to include the sale of its Haven 12 real estate loan investment that has an outstanding principal and accrued interest amount of approximately $7.3 million.


Item 1B.	Unresolved Staff Comments

None.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Significant Developments

During the nine-month period ended September 30, 2019, we acquired two office buildings, two multifamily communities, five grocery-anchored shopping centers and one student housing property.

During the nine-month period ended September 30, 2019, we issued 372,540 Units and collected net proceeds of approximately $335.2 million from our $1.5 Billion Unit Offering. We also issued 46,765 shares of Series M Preferred Stock and collected net proceeds of approximately $45.4 million from our mShares Offering. On September 27, 2019, the SEC declared effective our offering of up to a maximum of 1,000,000 shares of Series A1 Redeemable Preferred Stock, Series M1 Redeemable Preferred Stock, or a combination of both (the "Series A1/M1 Registration Statement"). Our Preferred Stock offerings and our other equity offerings are discussed in detail in the Liquidity and Capital Resources section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

In addition, during the nine-month period ended September 30, 2019, we issued 780,880 shares of Common Stock upon the exercise of Warrants issued in our offerings of our Series A Redeemable Preferred Stock and collected net proceeds of approximately $10.1 million from those exercises.

As of September 30, 2019, we are continuing to explore the process of internalization, whereby we would assume the functions and incur the costs of such functions that historically were performed by Preferred Apartment Advisors, LLC, or our Manager, and its affiliates. No signed agreement is currently in place and we do not currently have a definitive timeline to complete the internalization, if any were to occur.

Forward-looking Statements

Certain statements contained in this Annual Report on Form 10-K, including, without limitation, statements containing the words "believes," "anticipates," "intends," "expects," "assumes," "goals," "guidance," "trends" and similar expressions, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon our current plans, expectations and projections about future events. However, such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following:

• our business and investment strategy;

• our projected operating results;


•	actions and initiatives of the U.S. Government and changes to U.S. Government policies and the execution and impact of these actions, initiatives and policies;

• the state of the U.S. economy generally or in specific geographic areas;

• economic trends and economic recoveries;


•	our ability to obtain and maintain financing arrangements, including through Fannie Mae and Freddie Mac;

• financing and advance rates for our target assets;

• our expected leverage;

• changes in the values of our assets;

• our expected portfolio of assets;

• our expected investments;

• interest rate mismatches between our target assets and our borrowings used to fund such investments;

• changes in interest rates and the market value of our target assets;

• changes in prepayment rates on our target assets;

• effects of hedging instruments on our target assets;

• rates of default or decreased recovery rates on our target assets;

•changes in our operating costs, including real estate taxes, utilities and insurance costs;

• the degree to which our hedging strategies may or may not protect us from interest rate volatility;

• impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters;

• our ability to maintain our qualification as a real estate investment trust, or REIT, for U.S. federal income tax purposes;

• our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended;

• the availability of investment opportunities in mortgage-related and real estate-related investments and securities;

• the availability of qualified personnel;

• estimates relating to our ability to make distributions to our stockholders in the future;

• our understanding of our competition;

• market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy;


•	weakness in the national, regional and local economies, which could adversely impact consumer spending and retail sales and in turn tenant demand for space and could lead to increased store closings;


•	changes in market rental rates;


•	changes in demographics (including the number of households and average household income) surrounding our shopping centers;


•	adverse financial conditions for grocery anchors and other retail, service, medical or restaurant tenants;


•	continued consolidation in the grocery-anchored shopping center sector;


•	excess amount of retail space in our markets;


•	reduction in the demand by tenants to occupy our shopping centers as a result of reduced consumer demand for certain retail formats;


•	the growth of super-centers and warehouse club retailers, such as those operated by Wal-Mart and Costco, and their adverse effect on traditional grocery chains;


•	the entry of new market participants into the food sales business, such as Amazon's acquisition of Whole Foods, the growth of online food delivery services and online supermarket retailers and their collective adverse effect on traditional grocery chains;


•	our ability to aggregate a critical mass of grocery-anchored shopping centers;


•	the impact of an increase in energy costs on consumers and its consequential effect on the number of shopping visits to our centers; and


•	consequences of any armed conflict involving, or terrorist attack against, the United States.

Forward-looking statements are found throughout this "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission, or SEC, we do not have any intention or obligation to publicly release any revisions to forward-looking statements to reflect unforeseen or other events after the date of this report. The forward-looking statements should be read in light of the risk factors indicated in the section entitled "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018 and as may be supplemented by any amendments to our risk factors in our subsequent quarterly reports on Form 10-Q and other reports filed with the SEC, which are accessible on the SEC’s website at www.sec.gov.

General

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operations and financial position. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Industry Outlook

We believe continued, albeit potentially sporadic, improvement in the United States' economy will continue for 2019, given the continued job growth and improvements in consumer confidence. The presidential administration certainly creates more uncertainty in the direction and trajectory of economic growth. We believe a growing economy, improved job market and increased consumer confidence should help create favorable conditions for the multifamily sector. If the economy continues to improve, we expect current occupancy rates generally to remain stable on an annual basis as we believe the current level of occupancy nationwide will be difficult to measurably improve upon.

Multifamily Communities

The pipeline of new multifamily construction, although increasing nationwide in recent years, may be showing signs of declining going forward, or at least plateauing. The new supply coming on line to date has been generally in line with demand in most of our markets although we have seen some areas where demand is falling short of new supply. Nationally, new multifamily construction is currently at or above average historical levels in most markets. Even with the increase in new supply of multifamily properties, recent job growth and demographic trends have led to reasonable levels of absorption in most of our markets. The absorption rate has led to generally stable occupancy rates with increases in rental rates in most of our markets. We believe the

supply of new multifamily construction will not increase dramatically as the constraints in the market (including availability of quality sites and the difficult permitting and entitlement process) will constrain further increases in multifamily supply. We expect that new supply is at or near a peak and these constraints may result in a leveling out or decline in new multifamily “starts” in 2019 and 2020. As an offset, the presidential administration may loosen banking regulation standards, which could cause an increase in available capital for new construction. Any relaxing of these regulations could lead to more capital for new multifamily development and an increase in supply. The cost of private capital, less debt capital available from traditional commercial banks for real estate loans and a softening of the market in some “Gateway” cities have all put pressure on the pricing dynamic in multifamily transactions. This could lead to an increase in capitalization rates and a softening price environment, and if this were to occur, then our pipeline of candidate multifamily property acquisitions with returns meeting our investment objectives may expand. However, it is important to note that, currently, equity capital for multifamily product remains available and has fueled the demand for the product which has led to the recent cap rate compression. Currently, that availability of capital remains strong and the investment market for multifamily remains popular.

The recent declines in U.S. Treasury yields combined with competitive lender spreads have maintained a favorable borrowing environment for multifamily owners and developers. Given the uncertainty around the world's financial markets, fueled in part by the U.S. President and how his policies may affect domestic and international markets, investors have been wary in their approach to debt markets. Recent US bond market movements have seen rates decline and spreads from the government-sponsored entity, or GSE, lenders have been relatively stable with slightly more volatility than in the recent past. Other lenders in the market have had generally stable spreads as well and some lenders have actually dropped spreads in our markets. During the balance of 2019, we may well see spreads remaining at or near current levels as the investment community becomes more comfortable with the direction of the market and the US economy. With the recent decrease in U.S. Treasury rates, we expect the market to continue to remain favorable for financing multifamily communities, as the equity and debt markets have generally continued to view the U.S. multifamily sector as a desirable investment. Lending by GSEs is limited by the recent caps on production or capital retention rates imposed by the Federal Housing and Finance Association. The new caps set production levels generally in line with the agencies recent history. It could be the case that the agencies new caps lead to higher lending rates in the short term as the agencies and the market digest the new caps. Although we expect such higher costs to be offset by increased lending activity by other market participants; such other market participants may have increased costs and stricter underwriting criteria. Recently, there has been increased dialog from multiple sources discussing the future of the GSEs. Any change to the structure of the GSEs and their business model could have material impacts on the multifamily debt capital markets generally.

We believe the combination of a difficult regulatory environment and high underwriting standards for commercial banks will continue to create a choppy market for new construction financing. In addition, we believe the continued hesitance among many prospective homebuyers to believe the net benefits of home ownership are greater than the benefit of the flexibility offered through renting will continue to work in the existing multifamily sector's favor. We also believe there will be a continued boost to demand for multifamily rental housing due to the ongoing entry of the “millennial” generation, the sons and daughters of the babyboom generation, into the workforce. This generation has a higher statistical propensity to rent their home and stay a renter deeper into their life-cycle, resulting in an increase in demand for rental housing. This combination of factors should generally result in gradual increases in market rents, lower concessions and opportunities for increases in ancillary fee income.

Student Housing Properties

Regarding the student housing industry, the Fall 2019 preleasing numbers were very consistent with last year, which is encouraging considering the roughly 10% increase in anticipated supply this year. Industry reports suggest that nationally, effective rents were up 1.7% as of June, slightly higher than 2018’s growth. The top 10 universities for rent growth are all experiencing growth over 5%, however, nearly all of them have seen little to no new supply as of late. Over the past four years, national occupancy levels have stayed fairly consistent at approximately 95%. There were roughly 48,000 student housing beds delivered across the country in the fall of 2019, with a similar forecast for fall of 2020 delivery. This inventory growth, while greater than the two previous years, remains in line with recent levels.

Industry reports estimate that there will be approximately 22.6 million students enrolled at US colleges by 2026. Industry reports also forecast US enrollment to grow by 1.1% annually from 2018 to 2023, while they estimate that undergraduate college enrollment will grow by an annual average of 1.5% over the next six years. We believe that the primary drivers of expanding enrollment will be moderate job growth, positive 18 to 24 year old population growth, and historically high enrollment rates of 68% to 70% over the next four years among high school graduates.

Preferred Office Properties

The office investment market continues to post healthy fundamentals across our current and target footprint, where we are primarily focused on high growth, non-“Gateway” markets. Due to banking reforms and conservative behavior among market participants, this cycle has been characterized by an historically low level of speculative office construction which is supporting continued good performance.

Critical Accounting Policies

There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

New Accounting Pronouncements

For a discussion of our adoption of new accounting pronouncements, please see Note 2 of our Consolidated Financial Statements.

Results of Operations

Certain financial highlights of our results of operations for the three-month and nine-month periods ended September 30, 2019 were:




	Three months ended September 30,								Nine months ended September 30,
	2019			2018			% change		2019			2018			% change

Revenues (in thousands)	$	120,203		$	104,232		15.3	%	$	345,561		$	290,991		18.8	%

Per share data:
Net income (loss) ⁽¹⁾	$	(0.71	)	$	(0.35	)	—		$	(2.02	)	$	(1.16	)	—

FFO ⁽²⁾	$	0.31		$	0.28		10.7	%	$	1.06		$	1.03		2.9	%

AFFO ⁽²⁾	$	0.12		$	0.21		(42.9	)%	$	0.66		$	0.84		(21.4	)%

Dividends ⁽³⁾	$	0.2625		$	0.255		2.9	%	$	0.7850		$	0.76		3.3	%

⁽¹⁾ Per weighted average share of Common Stock outstanding for the periods indicated.

⁽²⁾ FFO and AFFO results are presented per weighted average share of Common Stock and Class A Unit in our Operating Partnership outstanding for the periods indicated.

⁽³⁾ Per share of Common Stock and Class A Unit outstanding.


•	For the third quarter 2019, our FFO payout ratio to Common Stockholders and Unitholders was approximately 85.0% and our FFO payout ratio (before the deduction of preferred dividends) to our preferred stockholders was approximately 67.5%. ^(A)

•

Our AFFO payout ratio to Common Stockholders and Unitholders was approximately 223.5% for the third quarter 2019 and 93.2% for the trailing twelve-month period ended September 30, 2019. Our AFFO payout ratio (before the deduction of preferred dividends) to our preferred stockholders was approximately 84.5% for the third quarter 2019 and 68.2% for the trailing twelve-month period ended September 30, 2019. ^(B)We have $27.9 million of earned but not yet payable interest on our real estate loan investment portfolio.


•	At September 30, 2019, the market value of our common stock was $14.45 per share. A hypothetical investment in our Common Stock in our initial public offering on April 5, 2011, assuming the reinvestment of all dividends and no transaction costs, would have resulted in an average annual return of approximately 17.4% through September 30, 2019.


•	As of September 30, 2019, the average age of our multifamily communities was approximately 5.4 years, which is the youngest in the public multifamily REIT industry.


•	As of September 30, 2019, approximately 91.6% of our permanent property-level mortgage debt has fixed interest rates and approximately 3.8% has variable interest rates which are capped. We believe we are well protected against potential increases in market interest rates.


•	During the third quarter 2019, we refinanced six retail assets with new fixed-rate mortgage debt and on October 1, we repaid two other maturing mortgages on retail properties which remain unencumbered.

•

At September 30, 2019, our leverage, as measured by the ratio of our debt to the undepreciated book value of our total assets, was approximately 52.4%. Included in our total assets were our investments in the Series 2018-ML04 and Series 2019-ML05 from the Freddie Mac K program. Our leverage calculation excludes the gross assets of approximately $586 million and liabilities of approximately $586 million that are owned by other pool participants in the Freddie Mac K program that we consolidated under the VIE rules.

•

As of September 30, 2019, our total assets were approximately $5.3 billion compared to approximately $4.1 billion as of September 30, 2018, an increase of approximately $1.1 billion, or approximately 26.9%. This growth was driven by (i) the acquisition of 12 net real estate properties (the net additions partially offset by the sale of two properties) and (ii) the consolidation of the mortgage pools from the Freddie Mac K program. Excluding the VIE mortgage pool assets from other participants in the K Program, our total assets grew approximately $789.0 million, or 20.3% since September 30, 2018.


•	On August 16, 2019, we closed on a real estate loan investment of up to approximately $14.8 million in connection with the development of Kennesaw Crossing, a 250-unit multifamily community to be located in Kennesaw, Georgia.


•	On October 30, 2019, we amended the purchase and sale agreement for the sale of six of our student housing properties to include the sale of our Haven 12 real estate loan investment that has an outstanding principal and accrued interest amount of approximately $7.3 million.

^(A)We calculate the FFO payout ratio to Common Stockholders as the ratio of Common Stock dividends and distributions to FFO Attributable to Common Stockholders and Unitholders. We calculate the FFO payout ratio to preferred stockholders as the ratio of Preferred Stock dividends to the sum of Preferred Stock dividends and FFO. Since our operations resulted in a net loss from continuing operations for the periods presented, a payout ratio based on net loss is not calculable. See Definitions of Non-GAAP Measures.

^(B)We calculate the AFFO payout ratio to Common Stockholders as the ratio of Common Stock dividends and distributions to AFFO. We calculate the AFFO payout ratio to preferred stockholders as the ratio of Preferred Stock dividends to the sum of Preferred Stock dividends and AFFO.

Real Estate Loan Investments

Certain real estate loan investments include limited purchase options and additional amounts of accrued interest, which becomes due in cash to us on the earliest to occur of: (i) the maturity of the loan, (ii) any uncured event of default as defined in the associated loan agreement, (iii) the sale of the project or the refinancing of the loan (other than a refinancing loan by us or one of our affiliates) and (iv) any other repayment of the loan. There are no contingent events that are necessary to occur for us to realize the additional interest amounts. We hold options, but not obligations, to purchase certain of the properties which are partially financed by our real estate loans, as shown in the table below. The option purchase prices are negotiated at the time of the loan closing and are to be calculated based upon market cap rates at the time of exercise of the purchase option, with discounts ranging from between 10 and 60 basis points, depending on the loan.

As of September 30, 2019, our actual and potential purchase option portfolio consisted of:



		Total units upon	Purchase option window
Project/Property	Location	completion⁽¹⁾	Begin	End

Multifamily communities:
Falls at Forsyth	Atlanta, GA	356	S + 90 days⁽²⁾	S + 150 days⁽²⁾
V & Three	Charlotte, NC	338	S + 90 days⁽²⁾	S + 150 days⁽²⁾
The Anson	Nashville, TN	301	S + 90 days⁽²⁾	S + 150 days⁽²⁾
Southpoint	Fredericksburg, VA	240	S + 90 days⁽²⁾	S + 150 days⁽²⁾
E-Town	Jacksonville, FL	332	S + 90 days⁽³⁾	S + 150 days⁽³⁾
Vintage	Destin, FL	282	⁽⁴⁾	⁽⁴⁾
Hidden River II	Tampa, FL	204	S + 90 days⁽²⁾	S + 150 days⁽²⁾

Student housing properties:
Solis Kennesaw II	Atlanta, GA	175	⁽⁵⁾	⁽⁵⁾

Office property:
8West	Atlanta, GA	⁽⁶⁾	⁽⁶⁾	⁽⁶⁾

		2,228

⁽¹⁾ We evaluate each project individually and we make no assurance that we will acquire any of the underlying properties from our real estate loan investment portfolio. The purchase options held by us on the 464 Bishop, Hidden River I, Haven Charlotte, Sanibel Straights, Wiregrass, Newbergh, Cameron Square, Solis Kennesaw, Encore and Tampa projects were terminated, in exchange for an aggregate $20.2 million in termination fees from the developers, net of amounts due to third party loan participants.
⁽²⁾The option period window begins and ends at the number of days indicated beyond the achievement of a 93% physical occupancy rate by the underlying property.
⁽³⁾The option period window begins on the earlier of June 21, 2024 and the number of days indicated beyond the achievement of a 93% physical occupancy rate by the underlying property.
⁽⁴⁾The option period window begins on the later of one year following receipt of final certificate of occupancy or 90 days beyond the achievement of a 93% physical occupancy rate by the underlying property and ends 60 days beyond the option period beginning date.
⁽⁵⁾The option period begins on October 1 of the second academic year following project completion and ends on the following December 31. The developer may elect to expedite the option period to begin December 1, 2020 and end on December 31, 2020.
⁽⁶⁾The project plans are for the construction of a class A office building consisting of approximately 192,000 rentable square feet; our purchase option window opens 90 days following the achievement of 90% lease commencement and ends on November 30, 2024 (subject to adjustment). Our purchase option is at the to-be-agreed-upon market value. In the event the property is sold to a third party, we would be due a fee based on a minimum multiple of 1.15 times the total commitment amount of the real estate loan investment, less the amounts actually paid by the borrower, up to and including payment of accrued interest and repayment of principal at the time of the sale.

Three-month and nine-month periods ended September 30, 2019 compared to 2018

The following discussion and tabular presentations highlight the major drivers behind the line item changes in our results of operations for the three-month and nine-month periods ended September 30, 2019 versus 2018:



Preferred Apartment Communities, Inc.	Three months ended September 30,						Change inc (dec)
	2019			2018			Amount			Percentage
Revenues:
Rental revenues	$	101,817		$	84,500		$	17,317		20.5	%
Other property revenues	3,232			2,443			789			32.3	%
Interest income on loans and notes receivable	12,608			13,618			(1,010		)	(7.4	)%
Interest income from related parties	2,546			3,671			(1,125		)	(30.6	)%
Total revenues	120,203			104,232			15,971			15.3	%

Operating expenses:
Property operating and maintenance	14,928			12,893			2,035			15.8	%
Property salary and benefits	5,360			4,911			449			9.1	%
Property management fees	3,534			2,998			536			17.9	%
Real estate taxes	12,870			10,597			2,273			21.4	%
General and administrative	1,898			2,221			(323		)	(14.5	)%
Equity compensation to directors and executives	305			796			(491		)	(61.7	)%
Depreciation and amortization	46,239			44,499			1,740			3.9	%
Asset management and general and administrative
expense fees to related parties	8,611			7,234			1,377			19.0	%
Loan loss allowance	—			3,029			(3,029		)	(100.0	)%
Insurance, professional fees and other expenses	3,453			1,713			1,740			101.6	%

Total operating expenses	97,198			90,891			6,307			6.9	%
Waived asset management and general and administrative
expense fees	(3,081		)	(1,934		)	(1,147		)	59.3	%

Net operating expenses	94,117			88,957			5,160			5.8	%
Operating income before gains on sales of
real estate	26,086			15,275			10,811			70.8	%
Gain on sale of real estate	—			18,605			(18,605		)	(100.0	)%
Operating income	26,086			33,880			(7,794		)	(23.0	)%
Interest expense	28,799			25,657			3,142			12.2	%
Change in fair value of net assets of consolidated
VIE from mortgage-backed pool	591			131			460			351.1	%
Loss on debt extinguishment	(15		)	—			(15		)	—	%
Net (loss) income	(2,137		)	8,354			(10,491		)	(125.6	)%
Consolidated net loss (income) attributable to non-controlling interests	59			(216		)	275			(127.3	)%

Net (loss) income attributable to the Company	$	(2,078	)	$	8,138		$	(10,216	)	(125.5	)%



Preferred Apartment Communities, Inc.	Nine months ended September 30,						Change inc (dec)
	2019			2018			Amount			Percentage
Revenues:
Rental revenues	$	289,647		$	235,314		$	54,333		23.1	%
Other property revenues	8,922			5,791			3,131			54.1	%
Interest income on loans and notes receivable	35,989			37,576			(1,587		)	(4.2	)%
Interest income from related parties	9,980			12,310			(2,330		)	(18.9	)%
Miscellaneous revenues	1,023			—			1,023			—	%
Total revenues	345,561			290,991			54,570			18.8	%

Operating expenses:
Property operating and maintenance	38,186			31,805			6,381			20.1	%
Property salary and benefits	14,845			13,038			1,807			13.9	%
Property management fees	10,174			8,530			1,644			19.3	%
Real estate taxes	37,914			30,635			7,279			23.8	%
General and administrative	6,425			6,019			406			6.7	%
Equity compensation to directors and executives	922			2,881			(1,959		)	(68.0	)%
Depreciation and amortization	137,191			127,210			9,981			7.8	%
Asset management and general and administrative
expense fees to related parties	24,649			20,096			4,553			22.7	%
Loan loss allowance	—			3,029			(3,029		)	(100.0	)%
Insurance, professional fees and other expenses	8,671			5,166			3,505			67.8	%

Total operating expenses	278,977			248,409			30,568			12.3	%
Waived asset management and general and administrative
expense fees	(8,505		)	(4,583		)	(3,922		)	85.6	%

Net operating expenses	270,472			243,826			26,646			10.9	%
Operating income before gains on sales of
real estate and trading investments	75,089			47,165			27,924			59.2	%
Gain on sale of real estate and trading investment	4			38,961			(38,957		)	—
Operating income	75,093			86,126			(11,033		)	(12.8	)%
Interest expense	83,166			68,972			14,194			20.6	%
Change in fair value of net assets of consolidated
VIE from mortgage-backed pool	1,316			185			1,131			611.4	%
Loss on debt extinguishment	(84		)	—			(84		)	—	%
Gain on sale of real estate loan investment	747			—			747			—	%
Net (loss) income	(6,094		)	17,339			(23,433		)	(135.1	)%
Consolidated net loss (income) attributable to non-controlling interests	138			(456		)	594			(130.3	)%

Net (loss) income attributable to the Company	$	(5,956	)	$	16,883		$	(22,839	)	(135.3	)%

New Market Properties, LLC

Our New Market Properties, LLC business consists of our portfolio of grocery-anchored shopping centers and our Dawson Marketplace real estate loan supporting a shopping center in the Atlanta, Georgia market. Comparative statements of operations of New Market Properties, LLC for the three-month and nine-month periods ended September 30, 2019 versus 2018 are presented below. These statements of operations include no allocations of corporate overhead or other expenses.



New Market Properties, LLC	Three months ended September 30,						Change inc (dec)
	2019			2018			Amount			Percentage
Revenues:
Rental revenues	$	24,654		$	19,303		$	5,351		27.7	%
Other property revenues	172			196			(24		)	(12.2	)%
Interest income on loans and notes receivable	444			507			(63		)	(12.4	)%
Total revenues	25,270			20,006			5,264			26.3	%

Operating expenses:
Property operating and maintenance	2,619			2,234			385			17.2	%
Property management fees	824			653			171			26.2	%
Real estate taxes	3,158			2,090			1,068			51.1	%
General and administrative	229			379			(150		)	(39.6	)%
Equity compensation to directors and executives	17			150			(133		)	(88.7	)%
Depreciation and amortization	11,677			10,462			1,215			11.6	%
Asset management and general and administrative
expense fees to related parties	1,892			1,522			370			24.3	%
Insurance, professional fees and other expenses	496			298			198			66.4	%
Total operating expenses	20,912			17,788			3,124			17.6	%
Waived asset management and general and administrative
expense fees	(94		)	(128		)	34			(26.6	)%
Net operating expenses	20,818			17,660			3,158			17.9	%

Operating income	4,452			2,346			2,106			89.8	%
Interest expense	6,422			5,071			1,351			26.6	%
Loss on extinguishment of debt	16			—			16			—	%
Net income (loss)	(1,986		)	(2,725		)	739			(27.1	)%
Consolidated net (income) loss attributable to non-controlling
interests	(12		)	—			(12		)	—	%
Net income (loss) attributable to the Company	$	(1,974	)	$	(2,725	)	$	751		(27.6	)%



New Market Properties, LLC	Nine months ended September 30,						Change inc (dec)
	2019			2018			Amount			Percentage
Revenues:
Rental revenues	$	68,529		$	54,209		$	14,320		26.4	%
Other property revenues	365			420			(55		)	(13.1	)%
Interest income on loans and notes receivable	1,317			1,504			(187		)	(12.4	)%
Total revenues	70,211			56,133			14,078			25.1	%

Operating expenses:
Property operating and maintenance	6,947			6,065			882			14.5	%
Property management fees	2,345			2,013			332			16.5	%
Real estate taxes	8,998			6,831			2,167			31.7	%
General and administrative	893			689			204			29.6	%
Equity compensation to directors and executives	53			446			(393		)	(88.1	)%
Depreciation and amortization	32,644			28,519			4,125			14.5	%
Asset management and general and administrative
expense fees to related parties	5,274			4,201			1,073			25.5	%
Insurance, professional fees and other expenses	1,189			814			375			46.1	%
Total operating expenses	58,343			49,578			8,765			17.7	%
Waived asset management and general and administrative
expense fees	(296		)	(251		)	(45		)	17.9	%
Net operating expenses	58,047			49,327			8,720			17.7	%

Operating income	12,164			6,806			5,358			78.7	%
Interest expense	18,123			14,056			4,067			28.9	%
Loss on extinguishment of debt	68			—			68			—	%
Net income (loss)	(6,027		)	(7,250		)	1,223			(16.9	)%
Consolidated net (income) loss attributable to non-controlling
interests	(12		)	—			(12		)	—	%
Net income (loss) attributable to the Company	$	(6,015	)	$	(7,250	)	$	1,235		(17.0	)%

Recent acquisitions

Our acquisitions (net of dispositions) of real estate assets since January 1, 2018 were the primary drivers behind our increases in rental and property revenues and property operating expenses for the three-month and nine-month periods ended September 30, 2019 versus 2018.

Real estate assets acquired

Acquisition date

Property

Location

Units

Beds

Leasable square feet

Multifamily communities:

1/9/2018

The Lux at Sorrel

Jacksonville, FL

265

n/a

2/28/2018

Green Park

Atlanta, GA

310

n/a

9/27/2018

The Lodge at Hidden River

Tampa, FL

300

n/a

11/9/2018

Vestavia Reserve

Birmingham, AL

272

n/a

11/15/2018

CityPark View South ⁽¹⁾

Charlotte, NC

200

n/a

8/8/2019

Artisan at Viera

Melbourne, FL

259

n/a

9/18/2019

Five Oaks at Westchase

Tampa, FL

218

n/a

New Market Properties:

4/27/2018

Greensboro Village

Nashville, TN

n/a

70,203

4/27/2018

Governors Towne Square

Atlanta, GA

n/a

68,658

6/26/2018

Neapolitan Way

Naples, FL

n/a

137,580

6/29/2018

Conway Plaza

Orlando, FL

n/a

117,705

7/6/2018

Brawley Commons

Charlotte, NC

n/a

122,028

12/21/2018

Hollymead Town Center

Charlottesville, VA

n/a

158,807

1/17/2019

Gayton Crossing

Richmond, VA

n/a

158,316

5/28/2019

Free State Shopping Center

Washington, D.C.

n/a

264,152

6/12/2019

Disston Plaza

Tampa - St. Petersburg, FL

n/a

129,150

6/12/2019

Polo Grounds Mall

West Palm Beach, FL

n/a

130,285

8/16/2019

Fairfield Shopping Center

Virginia Beach, VA

n/a

231,829

Student housing properties:

5/10/2018

The Tradition

College Station, TX

427

808

n/a

5/31/2018

The Retreat at Orlando

Orlando, FL

221

894

n/a

6/27/2018

The Bloc

Lubbock, TX

140

556

n/a

3/27/2019

Haven49

Charlotte, NC

322

887

n/a

Preferred Office Properties:

1/29/2018

Armour Yards

Atlanta, GA

n/a

187,000

7/31/2018

150 Fayetteville

Raleigh, NC

n/a

560,000

12/20/2018

Capitol Towers

Charlotte, NC

n/a

479,000

7/25/2019

CAPTRUST Tower

Raleigh, NC

n/a

300,000

7/31/2019

251 Armour

Atlanta, GA

n/a

35,000

2,934

3,145

3,149,713

⁽¹⁾ CityPark View South is a second phase of an existing property, and shares a leasing office with the original phase. Therefore, it is not counted as a separate property.

Real estate assets sold




Disposition date	Property	Location	Units

3/20/2018	Lake Cameron	Raleigh, NC	328
9/28/2018	Stone Rise	Philadelphia, PA	216
10/23/2018	Stoneridge Farms at the Hunt Club	Nashville, TN	364
12/11/2018	McNeil Ranch	Austin, TX	192

Rental Revenues

Rental revenue increased due primarily to properties acquired since January 1, 2018, as shown in the following table:



	Three-month period ended September 30,					Nine-month period ended September 30,
	2019 versus 2018					2019 versus 2018
	Increase (decrease)					Increase (decrease)
Rental revenues	Amount (rounded to 000s):			Percent of increase		Amount (rounded to 000s):			Percent of increase
Properties acquired since January 1, 2018	$	20,132		116.3	%	$	61,844		113.8	%
Properties sold since January 1, 2018	(2,999		)	(17.3	)%	(9,838		)	(18.1	)%
Properties acquired in 2011 - 2017	184			1.0	%	2,327			4.3	%

Total	$	17,317		100.0	%	$	54,333		100.0	%

Increases in occupancy rates and in percentages of leased space and rent growth are the primary drivers of increases in rental revenue from our owned properties. Factors which we believe affect market rents include vacant unit inventory in local markets, local and national economic growth and resultant employment stability, income levels and growth, the ease of obtaining credit for home purchases, and changes in demand due to consumer confidence in the above factors.

We also collect revenue from residents and tenants for items such as utilities, application fees, lease termination fees, common area maintenance reimbursements and late charges. The increases in these other property revenues for the three-month and nine-month periods ended September 30, 2019 versus 2018 were primarily due to the acquisitions listed above, and approximately $1.6 million in lease termination revenues recorded in the nine month period ended September 30, 2019.

Interest income from our real estate loan investments decreased for the three-month and nine-month periods ended September 30, 2019 versus 2018. The principal amount outstanding on our portfolio of real estate loan investments decreased to approximately $383.2 million at September 30, 2019 from $392.2 million at September 30, 2018. The total commitment amount of our real estate loan investment portfolio decreased from approximately $515.5 million at September 30, 2018 to $457.9 million at September 30, 2019. Real estate loan investments supporting four multifamily communities and two student housing properties were repaid or settled between September 30, 2018 and September 30, 2019.

We recorded interest income and other revenue from these instruments as presented in Note 4 to the Company's Consolidated Financial Statements.

Property operating and maintenance expense

Expenses to operate and maintain our properties increased due primarily to properties acquired since January 1, 2018, as shown in the following table. The primary components of operating and maintenance expense are utilities, property repairs, and landscaping costs. The expenses incurred for property repairs and, to a lesser extent, utilities could generally be expected to increase gradually over time as the buildings and properties age. Utility costs may generally be expected to increase in future periods as rate increases from providing carriers are passed on to our residents and tenants.



	Three-month period ended September 30,					Nine-month period ended September 30,
	2019 versus 2018					2019 versus 2018
	Increase (decrease)					Increase (decrease)
Property operating and maintenance expense	Amount (rounded to 000s):			Percent of increase		Amount (rounded to 000s):			Percent of increase
Properties acquired since January 1, 2018	$	2,704		132.9	%	$	8,569		134.3	%
Properties sold since January 1, 2018	(521		)	(25.6	)%	(1,741		)	(27.3	)%
Properties acquired in 2011 - 2017	(148		)	(7.3	)%	(447		)	(7.0	)%

Total	$	2,035		100.0	%	$	6,381		100.0	%

Property salary and benefits

We recorded property salary and benefits expense for individuals who handle the on-site management, operations and maintenance of our properties. These costs increased primarily due to the incremental costs brought on by additional personnel necessary to manage and operate properties acquired since January 1, 2018, as shown in the following table:



	Three-month period ended September 30,					Nine-month period ended September 30,
	2019 versus 2018					2019 versus 2018
	Increase (decrease)					Increase (decrease)
Property salary and benefits	Amount (rounded to 000s):			Percent of increase		Amount (rounded to 000s):			Percent of increase
Properties acquired since January 1, 2018	$	729		162.4	%	$	2,596		143.7	%
Properties sold since January 1, 2018	(275		)	(61.2	)%	(925		)	(51.2	)%
Properties acquired in 2011 - 2017	(5		)	(1.2	)%	136			7.5	%

Total	$	449		100.0	%	$	1,807		100.0	%

Property management fees

We pay a fee for property management services to our Manager in an amount of 4% of gross property revenues as compensation for services such as rental, leasing, operation and management of our multifamily communities and the supervision of any subcontractors; for grocery-anchored shopping center assets, property management fees are generally 4% of gross property revenues, of which generally 2.0% to 2.5% is paid to a third party management company. Property management fees for office building assets are within the range of 2.0% to 2.75% of gross property revenues, of which 1.5% to 2.25% is paid to a third party management company. The increases were primarily due to properties acquired since January 1, 2018, as shown in the following table:



	Three-month period ended September 30,					Nine-month period ended September 30,
	2019 versus 2018					2019 versus 2018
	Increase (decrease)					Increase (decrease)
Property management fees	Amount (rounded to 000s):			Percent of increase		Amount (rounded to 000s):			Percent of increase
Properties acquired since January 1, 2018	$	584		109.0	%	$	1,943		118.2	%
Properties sold since January 1, 2018	(125		)	(23.4	)%	(412		)	(25.1	)%
Properties acquired in 2011 - 2017	77			14.4	%	113			6.9	%

Total	$	536		100.0	%	$	1,644		100.0	%

Real estate taxes

We are liable for property taxes due to the various counties and municipalities that levy such taxes on real property for each of our properties. Real estate taxes rose primarily due to the incremental costs brought on by properties acquired since January 1, 2018, as shown in the following table:



	Three-month period ended September 30,					Nine-month period ended September 30,
	2019 versus 2018					2019 versus 2018
	Increase (decrease)					Increase (decrease)
Real estate taxes	Amount (rounded to 000s):			Percent of increase		Amount (rounded to 000s):			Percent of increase
Properties acquired since January 1, 2018	$	2,111		92.9	%	$	7,038		96.7	%
Properties sold since January 1, 2018	(415		)	(18.3	)%	(1,215		)	(16.7	)%
Properties acquired in 2011 - 2017	577			25.4	%	1,456			20.0	%

Total	$	2,273		100.0	%	$	7,279		100.0	%

We generally expect the assessed values of our properties to rise over time, owing to our expectation of improving market conditions, as well as pressure on municipalities to raise revenues.

General and Administrative

The changes in general and administrative expenses occurred as shown in the following table:



	Three-month period ended September 30,					Nine-month period ended September 30,
	2019 versus 2018					2019 versus 2018
	Increase (decrease)					Increase (decrease)
General and administrative expense	Amount (rounded to 000s):			Percent of increase		Amount (rounded to 000s):			Percent of increase
Taxes, licenses and fees	$	(11	)	3.3	%	$	414		102.0	%
Properties acquired since January 1, 2018	$	(37	)	11.5	%	$	673		165.8	%
Properties sold since January 1, 2018	(59		)	18.3	%	(217		)	(53.5	)%
Properties acquired in 2011 - 2017	(216		)	66.9	%	(464		)	(114.3	)%

Total	$	(323	)	100.0	%	$	406		100.0	%

Equity compensation to directors and executives

Expenses recorded for equity compensation awards decreased for the three-month and nine-month periods ended September 30, 2019 versus 2018 primarily due to the lack of a Class B OP Unit grant for 2019. The Class B Unit grant made on January 2, 2018 was comprised of an aggregate 256,087 Class B Units with a fair value of approximately $4.3 million.

Depreciation and amortization

The increases in depreciation and amortization for the three-month and nine-month periods ended September 30, 2019 versus 2018 are primarily due to acquisitions made during 2019.

Asset management fees and general and administrative fees to related party

Monthly asset management fees are equal to one-twelfth of 0.50% of the total book value of assets, as adjusted. General and administrative expense fees are equal to 2% of the monthly gross revenues of the Company. Both are calculated as prescribed by the Management Agreement and are paid monthly to our Manager. These fees rose primarily due to the incremental assets and revenues brought on by acquired office buildings, grocery-anchored shopping centers, student housing properties and multifamily communities listed previously.

Insurance, professional fees and other expenses

The increases consisted of:



	Three-month period ended September 30,				Nine-month period ended September 30,
	2019 versus 2018				2019 versus 2018
	Increase (decrease)				Increase (decrease)
Insurance, professional fees and other expenses	Amount (rounded to 000s):		Percent of increase		Amount (rounded to 000s):		Percent of increase
Audit and tax fees	$	143	8.2	%	$	147	4.2	%
Insurance premiums and claims	504		29.0	%	1,591		45.4	%
Legal fees	271		15.6	%	506		14.4	%
Internalization costs	818		47.0	%	1,143		32.6	%
Other professional fees	4		0.2	%	118		3.4	%

Total	$	1,740	100.0	%	$	3,505	100.0	%

Waived asset management and general and administrative expense fees

The Manager may, in its discretion, waive some or all of the asset management, property management, or general and administrative fees for properties owned by the Company. The waived fees are converted at the time of such election into contingent fees, which are earned by the Manager only in the event of a sales transaction, and whereby the Company’s capital contributions for the property being sold exceed a 7% annual rate of return. The Company will recognize in future periods to the extent, if any, it determines that the sales transaction is probable, and that the estimated net sale proceeds would exceed the annual rate of return hurdle.

There were no contingent fees realized due to property sales for the three-month or nine-month periods ended September 30, 2019 or 2018.

Interest expense

The increases consisted of:



	Three-month period ended September 30,					Nine-month period ended September 30,
	2019 versus 2018					2019 versus 2018
	Increase (decrease)					Increase (decrease)
Interest expense	Amount (rounded to 000s):			Percent of increase		Amount (rounded to 000s):			Percent of increase
Properties acquired since January 1, 2018	$	5,901		187.8	%	$	19,734		139.0	%
Properties sold since January 1, 2018	(539		)	(17.2	)%	(1,767		)	(12.4	)%
Properties acquired in 2011 - 2017	(389		)	(12.4	)%	(419		)	(3.0	)%
KeyBank operating LOC and Term Notes	(1,029		)	(32.7	)%	(1,718		)	(12.1	)%
Loan participants	(802		)	(25.5	)%	(1,636		)	(11.5	)%

Total	$	3,142		100.0	%	$	14,194		100.0	%

See the sections entitled Contractual Obligations and Quantitative and Qualitative Disclosures About Market Risk.

Definitions of Non-GAAP Measures

We disclose FFO and AFFO, each of which meet the definition of a “non-GAAP financial measure”, as set forth in Item 10(e) of Regulation S-K promulgated by the SEC. As a result we are required to include in this filing a statement of why the Company believes that presentation of these measures provides useful information to investors. None of FFO and AFFO should be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our performance, and we believe that to understand our performance further FFO and AFFO should be compared with our reported net income or net loss and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated financial statements. FFO and AFFO are not considered measures of liquidity and are not alternatives to measures calculated under GAAP.

Funds From Operations Attributable to Common Stockholders and Unitholders (“FFO”)

FFO is one of the most commonly utilized Non-GAAP measures currently in practice. In its 2002 “White Paper on Funds From Operations,” which was restated in 2018, the National Association of Real Estate Investment Trusts, or NAREIT, standardized the definition of how Net income/loss should be adjusted to arrive at FFO, in the interests of uniformity and comparability. We have adopted the NAREIT definition for computing FFO as a meaningful supplemental gauge of our operating results, and as is most often presented by other REIT industry participants.

The NAREIT definition of FFO (and the one reported by the Company) is:

Net income/loss, excluding:


•	depreciation and amortization related to real estate;


•	gains and losses from the sale of certain real estate assets;


•	gains and losses from change in control and


•	impairment writedowns of certain real estate assets and investments in entities where the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity.

Not all companies necessarily utilize the standardized NAREIT definition of FFO, so caution should be taken in comparing the Company’s reported FFO results to those of other companies. The Company’s FFO results are comparable to the FFO results of other companies that follow the NAREIT definition of FFO and report these figures on that basis. FFO is a non-GAAP measure that is reconciled to its most comparable GAAP measure, net income/loss available to common stockholders.

Adjusted Funds From Operations Attributable to Common Stockholders and Unitholders (“AFFO”)

AFFO makes further adjustments to FFO results in order to arrive at a more refined measure of operating and financial performance. There is no industry standard definition of AFFO and practice is divergent across the industry. The Company calculates AFFO as:

FFO, plus:

• non-cash equity compensation to directors and executives;

• amortization of loan closing costs;

• losses on debt extinguishments or refinancing costs;

• weather-related property operating losses;

• amortization of loan coordination fees paid to the Manager;

• depreciation and amortization of non-real estate assets;

• net loan fees received;

• accrued interest income received;

• internalization costs;

• allowances for loan loss reserves;

• cash received for purchase option terminations;

• deemed dividends on preferred stock redemptions;

• non-cash dividends on Series M Preferred Stock; and

• amortization of lease inducements;

Less:

• non-cash loan interest income;

• cash paid for loan closing costs;

• amortization of acquired real estate intangible liabilities;

• amortization of straight line rent adjustments and deferred revenues; and

• normally-recurring capital expenditures and capitalized retail direct leasing costs.

AFFO figures reported by us may not be comparable to those AFFO figures reported by other companies. We utilize AFFO as another measure of the operating performance of our portfolio of real estate assets. We believe AFFO is useful to investors as a supplemental gauge of our operating performance and may be useful in comparing our operating performance with other real estate companies. Since our calculation of AFFO removes other significant non-cash charges and revenues and other costs which are not representative of our ongoing business operations, we believe it improves comparability to investors in assessing our core operating results across periods. AFFO is a non-GAAP measure that is reconciled to its most comparable GAAP measure, net income/loss available to common stockholders. FFO and AFFO are not considered measures of liquidity and are not alternatives to measures calculated under GAAP.



Reconciliation of FFO Attributable to Common Stockholders and Unitholders and AFFO
to Net (Loss) Income Attributable to Common Stockholders ^(A)
		Three months ended September 30,
(In thousands, except per-share figures)		2019			2018

Net loss attributable to common stockholders (See note 1)		$	(31,529	)	$	(14,227	)

Add:	Depreciation of real estate assets	37,381			33,037
	Amortization of acquired real estate intangible assets and deferred leasing costs	8,386			11,058
	Net loss attributable to non-controlling interests (See note 2)	(59		)	216
Less:	(Gain) loss on sale of real estate	—			(18,605		)
FFO attributable to common stockholders and unitholders		14,179			11,479

Add:	Loan cost amortization on acquisition term note	19			19
	Amortization of loan coordination fees paid to the Manager (See note 3)	492			673
	Payment of costs related to property refinancing	170			—
	Weather-related property operating losses	—			161
	Non-cash equity compensation to directors and executives	305			796
	Amortization of loan closing costs (See note 4)	1,168			1,309
	Depreciation/amortization of non-real estate assets	472			404
	Net loan fees received (See note 5)	148			248
	Accrued interest income received (See note 6)	—			4,298
	Internalization costs (See note 7)	818			—
	Loan loss allowance	—			3,029
	Deemed dividends from cash redemptions of preferred stock	5			2
	Amortization of lease inducements (See note 8)	435			387
	Non-cash dividends on Preferred Stock	147			63
Less:	Non-cash loan interest income (See note 6)	(3,763		)	(4,104		)
	Non-cash revenues from mortgage-backed securities	(281		)	(131		)
	Cash paid for loan closing costs	(29		)	(25		)
	Amortization of purchase option termination revenues (See note 9)	(1,283		)	(4,478		)
	Amortization of acquired above and below market lease intangibles
	and straight-line rental revenues (See note 10)	(4,293		)	(3,353		)
	Amortization of deferred revenues (See note 11)	(940		)	(680		)
	Normally recurring capital expenditures and leasing costs (See note 12)	(2,379		)	(1,528		)

AFFO		$	5,390		$	8,569

Common Stock dividends and distributions to Unitholders declared:
	Common Stock dividends	$	11,823		$	10,377
	Distributions to Unitholders (See note 2)	225			272
	Total	$	12,048		$	10,649

Common Stock dividends and Unitholder distributions per share		$	0.2625		$	0.255

FFO per weighted average basic share of Common Stock and Unit outstanding		$	0.31		$	0.28
AFFO per weighted average basic share of Common Stock and Unit outstanding		$	0.12		$	0.21

Weighted average shares of Common Stock and Units outstanding: ^(A)
	Basic:	44,703			40,300
	Common Stock	868			1,069
	Class A Units	45,571			41,369
	Common Stock and Class A Units

	Diluted Common Stock and Class A Units ^(B)	45,768			42,890

Actual shares of Common Stock outstanding, including 20 and 19 unvested shares
of restricted Common Stock at September 30, 2019 and 2018, respectively.		45,355			40,804
Actual Class A Units outstanding at September 30, 2019 and 2018, respectively.		856			1,068
	Total	46,211			41,872

(A) Units and Unitholders refer to Class A Units in our Operating Partnership (as defined in note 2), or Class A Units, and holders of Class A Units, respectively. Unitholders include recipients of awards of Class B Units in our Operating Partnership, or Class B Units, for annual service which became vested and earned and automatically converted to Class A Units. Unitholders also include the entity that contributed the Wade Green grocery-anchored shopping center. The Class A Units collectively represent an approximate 1.90% weighted average non-controlling interest in the Operating Partnership for the three-month period ended September 30, 2019.
(B) Since our FFO and AFFO results are positive for the periods reflected above, we are presenting recalculated diluted weighted average shares of Common Stock and Class A Units for these periods for purposes of this table, which includes the dilutive effect of common stock equivalents from grants of the Class B Units, warrants included in units of Series A Preferred Stock issued, as well as annual grants of restricted Common Stock. The weighted average shares of Common Stock outstanding presented on the Consolidated Statements of Operations are the same for basic and diluted for any period for which we recorded a net loss available to common stockholders.

See Notes to Reconciliation of FFO, Core FFO and AFFO to Net Income (Loss) Attributable to Common stockholders.



Reconciliation of FFO Attributable to Common Stockholders and Unitholders and AFFO
to Net (Loss) Income Attributable to Common Stockholders ^(A)
		Nine months ended September 30,
(In thousands, except per-share figures)		2019			2018

Net loss attributable to common stockholders (See note 1)		$	(88,497	)	$	(45,931	)

Add:	Depreciation of real estate assets	109,408			90,190
	Amortization of acquired real estate intangible assets and deferred leasing costs	26,402			35,963
	Net loss attributable to non-controlling interests (See note 2)	(138		)	456
Less:	(Gain) loss on sale of real estate	—			(38,961		)
FFO attributable to common stockholders and unitholders		47,175			41,717

Add:	Loan cost amortization on acquisition term note	58			63
	Amortization of loan coordination fees paid to the Manager (See note 3)	1,433			1,780
	Payment of costs related to property refinancing	594			61
	Weather-related property operating losses	—			(33		)
	Non-cash equity compensation to directors and executives	922			2,881
	Amortization of loan closing costs (See note 4)	3,458			3,567
	Depreciation/amortization of non-real estate assets	1,381			1,057
	Net loan fees received (See note 5)	674			1,459
	Accrued interest income received (See note 6)	5,078			8,410
	Internalization costs (See note 7)	1,143			—
	Loan loss allowance	—			3,029
	Deemed dividends from cash redemptions of preferred stock	12			522
	Amortization of lease inducements (See note 8)	1,295			955
	Non-cash dividends on Preferred Stock	359			216
Less:	Non-cash loan interest income (See note 6)	(10,745		)	(14,726		)
	Non-cash revenues from mortgage-backed securities	(696		)	(185		)
	Cash paid for loan closing costs	(37		)	(416		)
	Amortization of purchase option termination revenues (See note 9)	(2,370		)	(1,964		)
	Amortization of acquired above and below market lease intangibles
	and straight-line rental revenues (See note 10)	(12,375		)	(9,047		)
	Amortization of deferred revenues (See note 11)	(2,821		)	(1,765		)
	Normally recurring capital expenditures and leasing costs (See note 12)	(5,122		)	(3,482		)

AFFO		$	29,416		$	34,099

Common Stock dividends and distributions to Unitholders declared:
	Common Stock dividends	$	34,599		$	30,283
	Distributions to Unitholders (See note 2)	683			813
	Total	$	35,282		$	31,096

Common Stock dividends and Unitholder distributions per share		$	0.7850		$	0.76

FFO per weighted average basic share of Common Stock and Unit outstanding		$	1.06		$	1.03
AFFO per weighted average basic share of Common Stock and Unit outstanding		$	0.66		$	0.84

Weighted average shares of Common Stock and Units outstanding: ^(A)
	Basic:	43,703			39,598
	Common Stock	875			1,070
	Class A Units	44,578			40,668
	Common Stock and Class A Units

	Diluted Common Stock and Class A Units ^(B)	45,235			41,936

Actual shares of Common Stock outstanding, including 20 and 19 unvested shares
of restricted Common Stock at September 30, 2019 and 2018, respectively.		45,355			40,804
Actual Class A Units outstanding at September 30, 2019 and 2018, respectively.		856			1,068
	Total	46,211			41,872

(A) Units and Unitholders refer to Class A Units in our Operating Partnership (as defined in note 2), or Class A Units, and holders of Class A Units, respectively. Unitholders include recipients of awards of Class B Units in our Operating Partnership, or Class B Units, for annual service which became vested and earned and automatically converted to Class A Units. Unitholders also include the entity that contributed the Wade Green grocery-anchored shopping center. The Class A Units collectively represent an approximate 1.96% weighted average non-controlling interest in the Operating Partnership for the nine-month period ended September 30, 2019.
(B) Since our FFO and AFFO results are positive for the periods reflected above, we are presenting recalculated diluted weighted average shares of Common Stock and Class A Units for these periods for purposes of this table, which includes the dilutive effect of common stock equivalents from grants of the Class B Units, warrants included in units of Series A Preferred Stock issued, as well as annual grants of restricted Common Stock. The weighted average shares of Common Stock outstanding presented on the Consolidated Statements of Operations are the same for basic and diluted for any period for which we recorded a net loss available to common stockholders.

See Notes to Reconciliation of FFO, Core FFO and AFFO to Net Income (Loss) Attributable to Common stockholders.

Notes to Reconciliations of FFO Attributable to Common Stockholders and Unitholders and AFFO to Net Income (Loss) Attributable to Common Stockholders

Rental and other property revenues and property operating expenses for the quarter ended September 30, 2019 include activity for the properties acquired during the quarter only from their respective dates of acquisition. In addition, the third quarter 2019 period includes activity for the properties acquired since September 30, 2018. Rental and other property revenues and expenses for the third quarter 2018 include activity for the acquisitions made during that period only from their respective dates of acquisition.

Non-controlling interests in Preferred Apartment Communities Operating Partnership, L.P., or our Operating Partnership, consisted of a total of 856,409 Class A Units as of September 30, 2019. Included in this total are 419,228 Class A Units which were granted as partial consideration to the seller in conjunction with the seller's contribution to us on February 29, 2016 of the Wade Green grocery-anchored shopping center. The remaining Class A units were awarded primarily to our key executive officers. The Class A Units are apportioned a percentage of our financial results as non-controlling interests. The weighted average ownership percentage of these holders of Class A Units was calculated to be 1.90% and 2.59% for the three-month periods ended September 30, 2019 and 2018, respectively.

We pay loan coordination fees to Preferred Apartment Advisors, LLC, our Manager, to reflect the administrative effort involved in arranging debt financing for acquired properties. The fees are calculated as 0.6% of the amount of any mortgage indebtedness on newly-acquired properties or refinancing and are amortized over the lives of the respective mortgage loans. This non-cash amortization expense is an addition to FFO in the calculation of AFFO. At September 30, 2019, aggregate unamortized loan coordination fees were approximately $14.1 million, which will be amortized over a weighted average remaining loan life of approximately 10.4 years.

We incur loan closing costs on our existing mortgage loans, which are secured on a property-by-property basis by each of our acquired real estate assets, and also for occasional amendments to our syndicated revolving line of credit with Key Bank National Association, or our Revolving Line of Credit. Effective April 13, 2018, the maximum borrowing capacity on the Revolving Line of Credit was increased from $150 million to $200 million. These loan closing costs are also amortized over the lives of the respective loans and the Revolving Line of Credit, and this non-cash amortization expense is an addition to FFO in the calculation of AFFO. Neither we nor the Operating Partnership have any recourse liability in connection with any of the mortgage loans, nor do we have any cross-collateralization arrangements with respect to the assets securing the mortgage loans, other than security interests in 49% of the equity interests of the subsidiaries owning such assets, granted in connection with our Revolving Line of Credit, which provides for full recourse liability. At September 30, 2019, aggregate unamortized loan costs were approximately $25.1 million, which will be amortized over a weighted average remaining loan life of approximately 9.1 years.

We receive loan origination fees in conjunction with the origination of certain real estate loan investments. These fees are then recognized as revenue over the lives of the applicable loans as adjustments of yield using the effective interest method. The total fees received after the payment of loan origination fees to our Manager are additive adjustments in the calculation of AFFO. Correspondingly, the amortized non-cash income is a deduction in the calculation of AFFO. Over the lives of certain loans, we accrue additional interest amounts that become due to us at the time of repayment of the loan or refinancing of the property, or when the property is sold. This non-cash interest income is subtracted from FFO in our calculation of AFFO. The amount of additional accrued interest becomes an additive adjustment to FFO once received from the borrower (see note 6).


6)	This adjustment reflects the receipt during the periods presented of additional interest income (described in note 5 above) which was earned and accrued prior to those periods presented on various real estate loans.


7)	This adjustment reflects the add-back of exploratory expenses incurred by the Company related to the potential internalization of the functions performed by its Manager.


8)	This adjustment removes the non-cash amortization of costs incurred to induce tenants to lease space in our office buildings and grocery-anchored shopping centers.

Effective January 1, 2019, we terminated our purchase options on the Sanibel Straits, Newbergh, Wiregrass and Cameron Square multifamily communities and the Solis Kennesaw student housing property; on May 7, 2018, we terminated our purchase options on the Encore, Bishop Street and Hidden River multifamily communities and the Haven46 and Haven Charlotte student housing properties, all of which are (or were) partially supported by real estate loan investments held by us. In exchange, we arranged to receive termination fees aggregating approximately $20.2 million from the developers, which are recorded as revenue over the period beginning on the date of election until the earlier of (i) the maturity of the real estate loan investment and (ii) the sale of the property. The receipt of the cash termination fees are an additive adjustment in our calculation of AFFO and the removal of non-cash revenue from the recognition of the termination fees are a reduction to FFO in our calculation of AFFO; both of these adjustments are presented in a single net number within this line. For the three-month and nine month periods ended September 30, 2019, we had recognized termination fee revenues in excess of cash received, resulting in the negative adjustments shown to FFO in our calculation of AFFO.


10)	This adjustment reflects straight-line rent adjustments and the reversal of the non-cash amortization of below-market and above-market lease intangibles, which were recognized in conjunction with our acquisitions and which are amortized over the estimated average remaining lease terms from the acquisition date for multifamily communities and over the remaining lease terms for grocery-anchored

shopping center assets and office buildings. At September 30, 2019, the balance of unamortized below-market lease intangibles was approximately $53.0 million, which will be recognized over a weighted average remaining lease period of approximately 9.4 years.


11)	This adjustment removes the non-cash amortization of deferred revenue recorded by us in conjunction with Company-owned lessee-funded tenant improvements in our office buildings.

12)

We deduct from FFO normally recurring capital expenditures that are necessary to maintain our assets’ revenue streams in the calculation of AFFO. This adjustment also deducts from FFO capitalized amounts for third party costs during the period to originate or renew leases in our grocery-anchored shopping centers and office buildings. No adjustment is made in the calculation of AFFO for nonrecurring capital expenditures. See Capital Expenditures, Grocery-Anchored Shopping Center Portfolio, and Office Buildings Portfolio sections for definitions of these terms.

Liquidity and Capital Resources

Short-Term Liquidity

We believe our principal short-term liquidity needs are to fund:


•	operating expenses directly related to our portfolio of multifamily communities, student housing properties, grocery-anchored shopping centers and office properties (including regular maintenance items);


•	capital expenditures incurred to lease our multifamily communities, student housing properties, grocery-anchored shopping centers and office properties;


•	interest expense on our outstanding property level debt;


•	amounts due on our Credit Facility;


•	distributions that we pay to our preferred stockholders, common stockholders, and unitholders;


•	cash redemptions that we may pay to our preferred stockholders, and


•	committed investments.

We have a credit facility, or Credit Facility, with KeyBank National Association, or KeyBank, which defines a revolving line of credit, or Revolving Line of Credit, which is used to fund investments, capital expenditures, dividends (with consent of KeyBank), working capital and other general corporate purposes on an as needed basis. On March 23, 2018, the maximum borrowing capacity on the Revolving Line of Credit was increased to $200 million pursuant to an accordion feature. The accordion feature permits the maximum borrowing capacity to be expanded or contracted without amending any further terms of the instrument. On December 12, 2018, the Fourth Amended and Restated Credit Agreement, or the Amended and Restated Credit Agreement, was amended to extend the maturity to December 12, 2021, with an option to extend the maturity date to December 12, 2022, subject to certain conditions described therein. The Revolving Line of Credit accrues interest at a variable rate of one month LIBOR plus an applicable margin of 2.75% to 3.50% per annum, depending upon our leverage ratio. The weighted average interest rate for the Revolving Line of Credit was 5.53% for the nine-month period ended September 30, 2019. The Amended and Restated Credit Agreement also reduced the commitment fee on the average daily unused portion of the Revolving Line of Credit to 0.25% or 0.30% per annum, depending upon our outstanding Credit Facility balance.

On March 29, 2018, we refinanced the mortgage on our Sol student housing property. A short-term bridge loan was used to replace the mortgage being held on the Acquisition Facility. The mortgage principal balance of approximately $37.5 million remained the same under the new financing arrangement, and the existing variable interest rate increased 10 basis points, to 210 basis points over LIBOR. As a result of the refinance, we incurred expenses of approximately $61,000, which are included within the Interest Expense line of the Consolidated Statements of Operations.

On May 26, 2016, we utilized proceeds from the Interim Term Loan to partially finance the acquisition of Anderson Central, a grocery-anchored shopping center located in Anderson, South Carolina. The Interim Term Loan accrued interest at a rate of LIBOR plus 2.5% per annum and was repaid and extinguished during the first quarter 2018.

The Amended and Restated Credit Agreement contains certain affirmative and negative covenants including negative covenants that limit or restrict secured and unsecured indebtedness, mergers and fundamental changes, investments and acquisitions, liens and encumbrances, dividends, transactions with affiliates, burdensome agreements, changes in fiscal year and other matters customarily restricted in such agreements. The material financial covenants include minimum net worth and debt service coverage ratios and maximum leverage and dividend payout ratios. As of September 30, 2019, we were in compliance with all covenants related to the Fourth Amended and Restated Credit Agreement. Our results with respect to such compliance are presented in Note 9 to the Company's Consolidated Financial Statements.

On February 28, 2017, we entered into a revolving acquisition credit agreement, or Acquisition Credit Agreement, with KeyBank to obtain an acquisition revolving credit facility, or Acquisition Facility, with a maximum borrowing capacity of $200 million. The sole purpose of the Acquisition Credit Agreement is to finance our acquisitions of multifamily communities and student housing communities prior to obtaining permanent conventional mortgage financing on the acquired assets. The maximum borrowing capacity on the Acquisition Facility was reduced by agreement with KeyBank to $90 million on March 25, 2019. The Acquisition Facility accrues interest at a variable rate of one month LIBOR plus a margin of between 1.75% per annum and 2.20% per annum, depending on the type of assets acquired and the resulting property debt service coverage ratio. The Acquisition Facility has a maturity date of March 1, 2022 and has two one-year extension options, subject to certain conditions described therein.

Our net cash provided by operating activities for the nine-month periods ended September 30, 2019 and 2018 was approximately $124.4 million and $112.0 million, respectively. The increase in net cash provided by operating activities was primarily due to incremental cash generated by property income provided by real estate assets acquired since September 30, 2018.

The majority of our revenue is derived from residents and tenants under existing leases at our multifamily communities, student housing properties, grocery-anchored shopping centers and office properties. Therefore, our operating cash flow is principally dependent on: (1) the number of multifamily communities, student housing properties, grocery-anchored shopping centers and office properties in our portfolio; (2) rental rates; (3) occupancy rates; (4) operating expenses associated with these properties; and (5) the ability of our residents and tenants to make their rental payments.

We also earn interest revenue from the issuance of real estate-related loans and may receive fees at the inception of these loans for committing and originating them. Interest revenue we receive on these loans is influenced by (1) market interest rates on similar loans; (2) the availability of credit from alternative financing sources; (3) the desire of borrowers to finance new real estate projects; and (4) unique characteristics attached to these loans, such as exclusive purchase options. In the course of extending real estate loan investments for property development, we will often receive an exclusive option to purchase the property once development and stabilization are complete. If we do not wish to acquire the property, we have the right to sell the purchase option back to the borrower for a termination fee in the amount of the purchase option discount, which is recognized as interest income over the earlier of the maturity date of the loan or the sale of the property.

Interest income on our loans and notes receivable decreased from $49.9 million for the nine-month period ended September 30, 2018 to $46.0 million for the nine-month period ended September 30, 2019, primarily due to the repayment or settlement since September 30, 2018 of 9 real estate loan investments with an aggregate commitment amount of $139.9 million which supported 6 real estate development projects.

Our net cash used in investing activities for the nine-month periods ended September 30, 2019 and 2018 was approximately $530.0 million and $625.7 million, respectively. Cash disbursed for property acquisitions decreased from $662.9 million in the 2018 period to $442.4 million in the 2019 period, partially offset by the investing cash inflow from the sale of mortgage-backed securities of approximately $53.4 million.

Cash used in investing activities is primarily driven by acquisitions and dispositions of multifamily properties, student housing properties, office properties and grocery-anchored shopping centers and acquisitions and maturities or other dispositions of real estate loans and other real estate and real estate-related assets, and secondarily by capital expenditures related to our owned properties. We will seek to acquire more multifamily communities, student housing properties, office properties and grocery-anchored shopping centers at costs that we expect will be accretive to our financial results. Capital expenditures may be nonrecurring and discretionary, as part of a strategic plan intended to increase a property’s value and corresponding revenue-generating power, or may be normally recurring and necessary to maintain the income streams and present value of a property. Certain capital expenditures may be budgeted and reserved for upon acquiring a property as initial expenditures necessary to bring a property up to our standards or to add features or amenities that we believe make the property a compelling value to prospective residents or tenants in its individual market. These budgeted nonrecurring capital expenditures in connection with an acquisition are funded from the capital source(s) for the acquisition and are not dependent upon subsequent property operational cash flows for funding.

For the nine-month period ended September 30, 2019, our capital expenditures for our multifamily communities, not including changes in related payables were as follows:



	Capital Expenditures
	Recurring				Non-recurring				Total
(In thousands, except per-unit amounts)	Amount		Per Unit		Amount		Per Unit		Amount		Per Unit
Appliances	$	366	$	36.52	$	—	$	—	$	366	$	36.52
Carpets	1,116		111.40		—		—		1,116		111.40
Wood flooring / vinyl	240		24.00		91		9.09		331		33.09
Blinds and ceiling fans	149		14.79		15		1.48		164		16.27
Fire safety	—		—		146		14.54		146		14.54
Furnace, air (HVAC)	419		41.77		13		1.27		432		43.04
Computers, equipment, misc.	10		1.04		201		20.07		211		21.11
Elevators	—		—		33		3.33		33		3.33
Exterior painting	—		—		833		83.15		833		83.15
Leasing office / common amenities	281		28.02		971		96.93		1,252		124.95
Major structural	—		—		1,886		188.17		1,886		188.17
Cabinets & countertop upgrades	—		—		548		54.70		548		54.70
Landscaping & fencing	—		—		897		89.57		897		89.57
Parking lot	—		—		370		36.91		370		36.91
Signage and sanitation	—		—		94		9.39		94		9.39

	$	2,581	$	257.54	$	6,098	$	608.60	$	8,679	$	866.14

For the nine-month period ended September 30, 2019, our capital expenditures for our student housing properties, not including changes in related payables were as follows:



	Capital Expenditures
	Recurring				Non-recurring				Total
(In thousands, except per-unit amounts)	Amount		Per Bed		Amount		Per Bed		Amount		Per Bed
Appliances	$	64	$	10.97	$	—	$	—	$	64	$	10.97
Carpets	207		35.58		—		—		207		35.58
Wood flooring / vinyl	5		0.81		30		5.14		35		5.95
Blinds and ceiling fans	26		4.50		—		—		26		4.50
Fire safety	—		—		151		26.04		151		26.04
Furnace, air (HVAC)	51		8.83		283		48.66		334		57.49
Computers, equipment, misc.	9		1.61		141		24.23		150		25.84
Elevators	—		—		—		—		—		—
Exterior painting	—		—		806		138.61		806		138.61
Leasing office / common amenities	26		4.39		314		54.03		340		58.42
Major structural	—		—		1,888		324.60		1,888		324.60
Cabinets & countertop upgrades	93		15.97		34		5.64		127		21.61
Landscaping & fencing	—		—		478		82.22		478		82.22
Parking lot	—		—		79		13.66		79		13.66
Signage and sanitation	—		—		139		23.95		139		23.95
Unit furniture	291		50.06		—		—		291		50.06

	$	772	$	132.72	$	4,343	$	746.78	$	5,115	$	879.50

In addition, second-generation capital expenditures within our grocery-anchored shopping center portfolio for the nine-month periods ended September 30, 2019 and 2018 totaled $1.3 million and $1.0 million, respectively. We define second-generation capital expenditures as those that exclude expenditures made in our grocery-anchored shopping center portfolio (i) to lease space to "first generation" tenants (i.e. leasing capital for existing vacancies and known move-outs at the time of acquisition), (ii) to bring recently acquired properties up to our ownership standards, and (iii) for property re-developments and repositioning.

Second-generation capital expenditures within our office properties portfolio for the nine-month periods ended September 30, 2019 and 2018 totaled $465,000 and $116,000, respectively. Second-generation capital expenditures exclude those expenditures made in our office properties portfolio (i) to lease space to "first generation" tenants (i.e. leasing capital for existing vacancies and known move-outs at the time of acquisition), (ii) to bring recently acquired properties up to our Class A ownership standards (and which amounts were underwritten into the total investment at the time of acquisition) and (iii) for property re-developments and repositionings.

At September 30, 2019, we had restricted cash of approximately $17.6 million that was contractually restricted to fund capital expenditures and other property-level commitments such as tenant improvements and leasing commissions.

Net cash provided by financing activities was approximately $465.1 million and $527.1 million for the nine-month periods ended September 30, 2019 and 2018, respectively. Our significant financing cash sources were approximately $329.9 million and $386.6 million of net proceeds from the mortgage financing transactions for the nine-month periods ended September 30, 2019 and 2018, respectively, and approximately $380.0 million and $303.4 million for the nine-month periods ended September 30, 2019 and 2018, respectively, of net proceeds from our offerings of our Preferred Stock Units.

Distributions

In order to maintain our status as a REIT for U.S. federal income tax purposes, we must comply with a number of organizational and operating requirements, including a requirement to distribute 90% of our annual REIT taxable income (which does not equal net income as calculated in accordance with GAAP and determined without regard for the deduction for dividends paid and excluding net capital gains) to our stockholders. As a REIT, we generally will not be subject to federal income taxes on the taxable income we distribute to our stockholders. Generally, our objective is to meet our short-term liquidity requirement of funding the payment of our quarterly Common Stock dividends, as well as monthly dividends to holders of our Series A Redeemable Preferred Stock and our mShares, through net cash generated from operating results.

Our board of directors reviews the Series A Redeemable Preferred Stock and our mShares dividends monthly to determine whether we have funds legally available for payment of such dividends in cash, and there can be no assurance that the Series A Redeemable Preferred Stock and our mShares dividends will consistently be paid in cash. Dividends may be paid as a combination of cash and stock in order to satisfy the annual distribution requirements applicable to REITs. We expect the aggregate dollar amount of monthly Series A Redeemable Preferred Stock and our mShares dividend payments to increase at a rate that approximates the rate at which we issue new Units from our $1.5 Billion Unit Offering and mShares from our mShares Offering, less those shares redeemed.

Our third quarter 2019 Common Stock dividend declaration of $0.2625 per share represented an overall increase of 110% from our initial Common Stock dividend per share of $0.125 following our IPO, or an average annual dividend growth rate of approximately 13.4% over the same period. Our board of directors reviews the proposed Common Stock dividend declarations quarterly, and there can be no assurance that the current dividend level will be maintained.

We believe that our short-term liquidity needs are and will continue to be adequately funded.

For the three-month period ended September 30, 2019, our aggregate dividends and distributions totaled approximately $41.5 million and our cash flows from operating activities were approximately $49.8 million. We expect our cash flow from operations over time to be sufficient to fund our quarterly Common Stock dividends, Class A Unit distributions and our monthly Series A Redeemable Preferred Stock and mShares dividends.

Long-Term Liquidity Needs

We believe our principal long-term liquidity needs are to fund:


•	the principal amount of our long-term debt as it becomes due or matures;


•	capital expenditures needed for our multifamily communities, student housing properties, grocery-anchored shopping centers and office properties;


•	costs associated with current and future capital raising activities;


•	costs to acquire additional multifamily communities, student housing properties, grocery-anchored shopping centers, office properties or other real estate and enter into new and fund existing lending opportunities; and


•	our minimum distributions necessary to maintain our REIT status.

We intend to finance our future investments with the net proceeds from additional issuances of our securities, including our $1.5 Billion Unit Offering, our mShares Offering (both as defined below), our 2019 Preferred Stock Offering (as defined and described in note 5 to our Consolidated Financial Statements), Common Stock, and units of limited partnership interest in our Operating Partnership, and/or borrowings. The success of our acquisition strategy may depend, in part, on our ability to access further capital through issuances of additional securities. If we are unsuccessful in raising additional funds, we may not be able to obtain any assets in addition to those we have acquired.

On February 14, 2017, the SEC declared effective our registration statement on Form S-3 (Registration No. 333-211924) for our offering for up to 1,500,000 Units, with each Unit consisting of one share of Series A Redeemable Preferred Stock and one Warrant to purchase up to 20 shares of Common Stock, referred to as our $1.5 Billion Unit Offering. The price per Unit is $1,000, subject to adjustment if a participating broker-dealer reduces its commission. We intend to invest substantially all the net proceeds of the $1.5 Billion Unit Offering in connection with the acquisition of multifamily communities, student housing communities, grocery-anchored shopping centers, office buildings and other real estate-related investments and general working capital purposes.

Aggregate offering expenses of the $1.5 Billion Unit Offering, including selling commissions and dealer manager fees, and of the mShares Offering, including dealer manager fees, are each individually capped at 11.5% of the aggregate gross proceeds of the two offerings. We will reimburse our Manager up to 1.5% of the gross proceeds of such offerings for all organization and offering expenses that are incurred by our Manager. However, upon approval by the conflicts committee of the board of directors, we may reimburse our Manager for any such organization and offering expenses incurred above the 1.5% amount as permitted by the Financial Industry Regulatory Authority, or FINRA. Dealer manager fees for both offerings and sales commissions for the $1.5 Billion Unit Offering are not reimbursable.

On December 2, 2016, the SEC declared effective our registration statement on Form S-3 (Registration No. 333-214531), for our offering of up to 500,000 shares of Series M Redeemable Preferred Stock, or mShares, par value $0.01 per share, or the mShares Offering. The price per mShare is $1,000. We intend to invest substantially all the net proceeds of the mShares Offering in connection with the acquisition of multifamily communities, student housing communities, grocery-anchored shopping centers, office buildings and other real estate-related investments and general working capital purposes.

At September 30, 2019, the Company's active equity offerings consisted of:


•	an offering of a maximum of 1,000,000 shares of Series A1 Preferred Stock, Series M1 Preferred Stock, or a combination of both under the Series A1/M1 Registration Statement;


•	an offering of a maximum of 1,500,000 Units, with each Unit consisting of one share of Series A Redeemable Preferred Stock and one Warrant to purchase up to 20 shares of Common Stock (the "$1.5 Billion Unit Offering");


•	an offering of up to a maximum of 500,000 shares of Series M Redeemable Preferred Stock (“mShares”), par value $0.01 per share (the “mShares Offering”); and


•	an offering of up to $400 million of equity or debt securities (the "2019 Shelf Offering"), including an offering of up to $125 million of Common Stock from time to time in an "at the market" offering (the "2019 ATM Offering").


•	an offering of up to 1,000,000 Shares of Series A1 Redeemable Preferred Stock ("Series A1 Preferred Stock"), Series M1 Redeemable Preferred Stock ("Series M1 Preferred Stock"), or a combination of both (collectively the "Series A1/M1 Offering").

For the three months and nine months ended September 30, 2019, no shares of our common stock were issued under our previously expired at-the-market offering of up to $150 million of common stock or our 2019 ATM Offering.

Our ability to raise funds through the issuance of our securities is dependent on, among other things, general market conditions for REITs, market perceptions about us, and the current trading price of our Common Stock. We will continue to analyze which source of capital is most advantageous to us at any particular point in time, but the equity and credit markets may not consistently be available on terms that are attractive to us or at all.

The sources to fulfill our long-term liquidity in the future may include borrowings from a number of sources, including repurchase agreements, securitizations, resecuritizations, warehouse facilities and credit facilities (including term loans and revolving facilities), in addition to our Revolving Line of Credit. We have utilized, and we intend to continue to utilize, leverage

in making our investments in multifamily communities and retail shopping centers. The number of different multifamily communities, retail shopping centers and other investments we will acquire will be affected by numerous factors, including the amount of funds available to us. By operating on a leveraged basis, we will have more funds available for our investments. This will allow us to make more investments than would otherwise be possible, resulting in a larger and more diversified portfolio.

We intend to target leverage levels (secured and unsecured) between 50% and 65% of the fair market value of our tangible assets (including our real estate assets, real estate loans, notes receivable, accounts receivable and cash and cash equivalents) on a portfolio basis. As of September 30, 2019, our outstanding debt (both secured and unsecured) was approximately 51% of the value of our tangible assets on a portfolio basis based on our estimates of fair market value at September 30, 2019. Neither our charter nor our by-laws contain any limitation on the amount of leverage we may use. Our investment guidelines, which can be amended by our board without stockholder approval, limit our borrowings (secured and unsecured) to 75% of the cost of our tangible assets at the time of any new borrowing. These targets, however, will not apply to individual real estate assets or investments. The amount of leverage we will place on particular investments will depend on our Manager's assessment of a variety of factors which may include the anticipated liquidity and price volatility of the assets in our investment portfolio, the potential for losses and extension risk in the portfolio, the availability and cost of financing the asset, our opinion of the creditworthiness of our financing counterparties, the health of the U.S. economy and the health of the commercial real estate market in general. In addition, factors such as our outlook on interest rates, changes in the yield curve slope, the level and volatility of interest rates and their associated credit spreads, the underlying collateral of our assets and our outlook on credit spreads relative to our outlook on interest rate and economic performance could all impact our decision and strategy for financing the target assets. At the date of acquisition of each asset, we anticipate that the investment cost for such asset will be substantially similar to its fair market value. However, subsequent events, including changes in the fair market value of our assets, could result in our exceeding these limits. Finally, we intend to acquire all our real estate assets through separate single purpose entities and we intend to finance each of these assets using debt financing techniques for that asset alone without any cross-collateralization to our other real estate assets or any guarantees by us or our Operating Partnership. We intend to have no long-term unsecured debt at the Company or Operating Partnership levels, except for our Revolving Line of Credit.

Our secured and unsecured aggregate borrowings are intended by us to be reasonable in relation to our tangible assets and will be reviewed by our board of directors at least quarterly. In determining whether our borrowings are reasonable in relation to our tangible assets, we expect that our board of directors will consider many factors, including without limitation the lending standards of government-sponsored enterprises, such as Fannie Mae and Freddie Mac, for loans in connection with the financing of multifamily properties, the leverage ratios of publicly traded and non-traded REITs with similar investment strategies, and general market conditions. There is no limitation on the amount that we may borrow for any single investment.

Our ability to incur additional debt is dependent on a number of factors, including our credit ratings (if any), the value of our assets, our degree of leverage and borrowing restrictions imposed by lenders. We will continue to monitor the debt markets, including Fannie Mae and/or Freddie Mac (from both of whom we have obtained single asset secured financing on all of our multifamily communities), and as market conditions permit, access borrowings that are advantageous to us.

If we are unable to obtain financing on favorable terms or at all, we may have to curtail our investment activities, including acquisitions and improvements to real properties, which could limit our growth prospects. This, in turn, could reduce cash available for distribution to our stockholders and may hinder our ability to raise capital by issuing more securities or borrowing more money. We may be forced to dispose of assets at inopportune times in order to maintain our REIT qualification and Investment Company Act exemption. Our ability to generate cash from asset sales is limited by market conditions and certain rules applicable to REITs. We may not be able to sell a property or properties as quickly as we would like or on terms as favorable as we would like.

Furthermore, if interest rates or other factors at the time of financing result in higher costs of financing, then the interest expense relating to that financed indebtedness would be higher. Higher interest rates on newly incurred debt may negatively impact us as well. If interest rates increase, our interest costs and overall costs of capital will increase, which could adversely affect our transaction and development activity, financial condition, results of operations, cash flow, our ability to pay principal and interest on our debt and our ability to pay distributions to our stockholders. Finally, sellers may be less inclined to offer to sell to us if they believe we may be unable to obtain financing.

As of September 30, 2019, we had long term mortgage indebtedness of approximately $2.6 billion, all of which was incurred by us in connection with the acquisition or refinancing of our real estate properties.

As of September 30, 2019, we had approximately $86.2 million in unrestricted cash and cash equivalents available to meet our short-term and long-term liquidity needs. We believe that our long-term liquidity needs are and will continue to be adequately funded through the sources discussed above.

Off-Balance Sheet Arrangements

As of September 30, 2019, we had 1,454,906 outstanding Warrants from our sales of Units. The Warrants are exercisable by the holder at an exercise price of 120% of the current market price per share of the Common Stock on the date of issuance of such Warrant, with a minimum exercise price of $19.50 per share for Warrants issued after February 15, 2017. The current market price per share is determined using the closing market price of the Common Stock immediately preceding the issuance of the Warrant. The Warrants are not exercisable until one year following the date of issuance and expire four years following the date of issuance. As of September 30, 2019, a total of 526,199 Warrants had been exercised into 10,523,980 shares of Common stock. The 1,454,906 Warrants outstanding at September 30, 2019 have exercise prices that range between $13.10 and $26.34 per share. If all the Warrants outstanding at September 30, 2019 became exercisable and were exercised, gross proceeds to us would be approximately $558.6 million and we would as a result issue an additional 29,098,120 shares of Common Stock.

Contractual Obligations

As of September 30, 2019, our contractual obligations consisted of the mortgage notes secured by our acquired properties and the Revolving Credit Facility. Based on a LIBOR rate of 2.02% at September 30, 2019, our estimated future required payments on these instruments were:



(In thousands)	Total		Less than one year		1-3 years		3-5 years		More than five years
Mortgage debt obligations:
Interest	831,264		103,654		190,854		159,485		377,271
Principal	2,604,479		133,288		336,580		371,061		1,763,550
Line of Credit:
Interest	8		8		—		—		—
Principal	50,000		50,000		—		—		—
Total	$	3,485,751	$	286,950	$	527,434	$	530,546	$	2,140,821

In addition, we had unfunded real estate loan balances totaling approximately $74.7 million at September 30, 2019.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Our primary market risk exposure is interest rate risk. All our floating-rate debt is tied to the 30-day LIBOR. As of September 30, 2019, we have variable rate mortgages on the properties listed in following table.



	Balance (in thousands)		Percentage of total mortgage indebtedness		LIBOR Cap		All-in Cap
Avenues at Creekside	$	39,077			5.0	%	6.6	%
The Tradition	30,000				3.3	%	7.0	%
The Bloc	28,966				3.3	%	6.8	%
Total capped floating-rate debt	98,043		3.8	%

Ursa	31,400				n/a		n/a
Haven 49	41,550				n/a		n/a
Champions Village	27,400				n/a		n/a
Fairfield Shopping Center	19,750
Total uncapped floating-rate debt	120,100		4.6	%

Total floating-rate debt	$	218,143	8.4	%

Our Revolving Line of Credit accrued interest at a spread of 3.0% over LIBOR as of September 30, 2019; this combined rate is uncapped. Because of the short term nature of the Revolving Line of Credit and Acquisition Credit Facility instruments, we believe our interest rate risk is minimal. We have no business operations which subject us to trading risk and no recourse liability or market or interest rate exposure to the consolidated VIE liabilities of the mortgage-backed pools from the Freddie Mac K Program.

We have and will continue to manage interest rate risk as follows:


•	maintain a reasonable ratio of fixed-rate, long-term debt to total debt so that floating-rate exposure is kept at an acceptable level;


•	place interest rate caps on floating-rate debt where appropriate; and


•	take advantage of favorable market conditions for long-term debt and/or equity financings.

We use various financial models and advisors to achieve our objectives.

If interest rates under our floating-rate LIBOR-based indebtedness fluctuated by 100 basis points, our interest costs, based on outstanding borrowings at September 30, 2019, would increase by approximately $1.6 million or decrease by approximately $1.3 million on an annualized basis.


Item 4.	Controls and Procedures

Evaluation of disclosure controls and procedures.

Management of the Company evaluated, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in the Exchange Act Rule 13a-15(e)) as of September 30, 2019, the end of the period covered by this report. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of the end of such period to provide reasonable assurance that that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in internal control over financial reporting.

As required by the Exchange Act Rule 13a-15(d), the Company's Chief Executive Officer and Chief Financial Officer evaluated the Company's internal control over financial reporting to determine whether any change occurred during the quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no such change during such period.


Item 1.	Legal Proceedings

Neither we nor our subsidiaries nor, to our knowledge, our Manager is currently subject to any legal proceedings that we or our Manager consider to be material. To our knowledge, none of our communities are currently subject to any legal proceeding that we consider material.

Item 1A. Risk Factors

There have been no material changes to our potential risks and uncertainties presented in the section entitled "Risk Factors" in our Annual Report on Form 10-K for the twelve months ended December 31, 2018 that was filed with the SEC on March 1, 2019.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

None.


Item 3.	Defaults Upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

Not applicable.


Item 5.	Other Information

None.


Item 6.	Exhibits

See Exhibit Index.



EXHIBIT INDEX
Exhibit Number		Description

4.1		Articles Supplementary for the Series A1 Redeemable Preferred Stock (incorporated by reference to Exhibit 4.3 to Form S-3 filed by the Company with the Securities and Exchange Commission on August 30, 2019).
4.2		Articles Supplementary for the Series A1 Redeemable Preferred Stock (incorporated by reference to Exhibit 4.4 to Form S-3 filed by the Company with the Securities and Exchange Commission on August 30, 2019).
4.3		Form of Subscription Agreement (incorporated by reference to Exhibit 4.5 to Form 8-K filed by the Company with the Securities and Exchange Commission on October 2, 2019).
31.1	*	Certification of Daniel M. DuPree, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	*	Certification of John A. Isakson, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	*	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	*	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	*	XBRL (eXtensible Business Reporting Language). The following materials from Preferred Apartment Communities, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2019, formatted in XBRL: (i) Consolidated balance sheets at September 30, 2019 and December 31, 2018, (ii) consolidated statements of operations for the three months and nine months ended September 30, 2019 and 2018, (iii) consolidated statements of stockholders' equity, (iv) consolidated statement of cash flows and (v) notes to consolidated financial statements.
	*	Filed or Furnished herewith
	+	Management contract or compensatory plan, contract or arrangement



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		PREFERRED APARTMENT COMMUNITIES, INC.

Date: November 4, 2019	By:	/s/ Daniel M. DuPree
		Daniel M. DuPree
		Chief Executive Officer
		(Principal Executive Officer)

Date: November 4, 2019	By:	/s/ John A. Isakson
		John A. Isakson
		Chief Financial Officer
		(Principal Financial Officer)