Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): February 6, 2017
Preferred Apartment Communities, Inc.
(Exact Name of Registrant as Specified in its Charter)
paca01.jpg
Maryland
001-34995
27-1712193
(State or other Jurisdiction
of Incorporation)
(Commission File Number)
(I.R.S. Employer
Identification No.)

3284 Northside Parkway NW, Suite 150, Atlanta, Georgia
30327
(Address of Principal Executive Offices)
(Zip Code)

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

(Former name or former address, if changed since last report)
_____________________

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
[ ]
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ]
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ]
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ]
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))




Item 8.01    Other Events.

On October 18, 2016, New Market - Champions, LLC (the "Purchaser"), an indirect, wholly-owned subsidiary of Preferred Apartment Communities Operating Partnership, L.P. ("PAC-OP"), completed the acquisition of a fee simple interest in a grocery-anchored shopping center in Houston, Texas ("Champions Village") from HR Venture Properties I, LLC (the "Seller"). Preferred Apartment Communities, Inc. (the "Company") is the general partner of, and owner of an approximate 96.5% interest in, PAC-OP. Outside of the acquisition of Champions Village, there is no relationship between the Company, PAC-OP or the Purchaser and the Seller.

This Current Report on Form 8-K is filed to provide certain financial information related to its acquisition of Champions Village required by Item 9.01(a) and (b) of Form 8-K.





Item 9.01    Financial Statements and Exhibits

(a)
Financial Statements of Businesses Acquired.

Champions Village
F-1
Independent Auditors' Report
F-2
Statements of Revenues and Certain Expenses for the nine months ended September 30, 2016 (unaudited) and the year ended December 31, 2015
F-3
Notes to Statements of Revenues and Certain Expenses
F-4

(b)
Pro Forma Financial Information.

Unaudited Pro Forma Condensed Consolidated Financial Statements
F-6
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2016
F-7
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 2016
F-8
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 2015
F-9
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
F-10

(c)    Exhibits

23.1
Consent of Deloitte & Touche LLP























CHAMPIONS VILLAGE
STATEMENTS OF REVENUES AND CERTAIN EXPENSES
WITH INDEPENDENT AUDITORS' REPORT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED) AND
THE YEAR ENDED DECEMBER 31, 2015




















F- 1


INDEPENDENT AUDITORS’ REPORT

To Preferred Apartment Communities, Inc.:
We have audited the accompanying Statement of Revenues and Certain Expenses of Champions Village, for the year ended December 31, 2015, and the related notes (the “Statement”).
Management's Responsibility for the Statement
Management is responsible for the preparation and fair presentation of this Statement in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the Statement that is free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on the Statement based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Statement is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Statement. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the Statement, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the Statement in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the Statement.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the Statement referred to above presents fairly, in all material respects, the revenues and certain expenses described in Note 2 of the Statement for the year ended December 31, 2015, in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matter
We draw attention to Note 2 of the Statement, which describes that the accompanying Statement was prepared for the purpose of complying with the rules and regulations under Rule 3-14 of Regulation S-X of the Securities and Exchange Commission (for inclusion in the Form 8-K of Preferred Apartment Communities, Inc.) and is not intended to be a complete presentation of Champions Village’s revenues and expenses. Our opinion is not modified with respect to this matter.

/s/ Deloitte & Touche LLP 
Houston, Texas
February 6, 2017




F- 2


Champions Village
Statements of Revenues and Certain Expenses
for the nine months ended September 30, 2016 (unaudited) and the year ended December 31, 2015
 
 
Nine Months ended September 30, 2016 (unaudited)
 
Year ended December 31, 2015
REVENUES:
 
 
 
 
Base rent
 
$
3,319,268

 
$
4,475,842

Tenant reimbursements
 
1,192,942

 
1,553,626

Other income
 
17,567

 
34,939

TOTAL REVENUES
 
4,529,777

 
6,064,407

 
 
 
 
 
CERTAIN EXPENSES:
 
 
 
 
Repairs and maintenance
 
404,729

 
517,645

Real estate taxes
 
881,722

 
1,162,316

Property management fees
 
147,655

 
182,367

Insurance
 
34,908

 
48,985

Utilities
 
143,071

 
167,109

Bad debt expense
 
198,125

 
9,624

Professional fees
 
78,759

 
16,725

General and administrative
 
29,302

 
46,736

TOTAL CERTAIN EXPENSES
 
1,918,271

 
2,151,507

 
 

 

Revenues in excess of certain expenses
 
$
2,611,506

 
$
3,912,900







See accompanying notes to Statements of Revenues and Certain Expenses.


F- 3


Champions Village
Notes to Statements of Revenues and Certain Expenses


1.
ORGANIZATION

Preferred Apartment Communities, Inc. (the “Company”) was formed as a Maryland corporation on September 18, 2009, and has elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, effective with its tax year ended December 31, 2011. The Company was formed to acquire multifamily and retail properties in select targeted markets throughout the United States. The Company is a majority owner in Preferred Apartment Communities Operating Partnership, L.P., which acquired a grocery-anchored shopping center in Houston, Texas (“Champions Village” or the "Property") from an unaffiliated third party (the “Seller”) on October 18, 2016. Prior to October 18, 2016, the Seller was responsible for all accounting and management decisions of the properties. The Property is anchored by a Randalls grocery store and as of September 30, 2016, was 77.3% occupied.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A.Basis of Presentation

The accompanying Statements of Revenues and Certain Expenses have been prepared for the purpose of complying with Rule 3-14 of Regulation S-X promulgated under the Securities Act of 1933, as amended, and accordingly, are not representative of the actual results of operations of the properties for the periods presented, due to the exclusion of the following revenue and expenses which may not be comparable to the proposed future operations of the Property:

Depreciation expense;
Interest income and expense, including amortization of mortgage loan origination costs;
Income tax expense;
Amortization of in-place leases, above/below market lease intangibles, and lease
origination costs, and
Amortization of mortgage discounts and premiums.


Except as noted above, management is not aware of any material factors relating to the property that would cause the reported financial information not to be indicative of future operating results. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for the fair presentation of these Statements of Revenues and Certain Expenses have been included.


The Statement of Revenues and Certain Expenses and notes thereto for the nine months ended September 30, 2016 included in this report are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of revenues and certain expenses have been included. Such adjustments consisted of normal recurring items. Interim results are not necessarily indicative of results for a full year.

B.
Use of Estimates

The preparation of these Statements of Revenues and Certain Expenses in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of revenues and certain expenses. Actual results could differ from those estimates.

C.    Revenue Recognition
Rental revenue is recognized on a straight-line basis. As such, the rental revenue for those leases that contain rent abatements and contractual increases are recognized on a straight-line basis over the applicable terms of the related lease. Percentage rents, which are based on tenants’ sales, are recognized once the sales reported by such tenants exceed any applicable breakpoints as specified in the tenants’ leases. The percentage rents are recognized based upon the measurement dates specified

F- 4


Champions Village
Notes to Statements of Revenues and Certain Expenses


in the leases. Reimbursements from tenants for real estate taxes, insurance and other shopping center operating expenses are recognized as revenue in the period that the applicable costs are incurred.

D.    Operating expenses

Operating expenses represent the direct expenses of operating the Property and consist primarily of repairs and maintenance, real estate taxes, management fees, insurance, utilities and other operating expenses that are expected to continue in the proposed future operations of the Property.

E.     Subsequent events

The Company has evaluated events through February 6, 2017, the date the Statements of Revenues and Certain Expenses were available to be issued and concluded that no subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes to the Statements of Revenues and Certain Expenses.

3.
OPERATING LEASES

The future minimum lease payments to be received under non-cancelable operating leases in effect as of December 31, 2015 are as follows:
2016
 
$
3,708,707

2017
 
3,150,510

2018
 
2,362,166

2019
 
1,447,349

2020
 
1,187,796

thereafter
 
2,158,368

 
 
 
Total
 
$
14,014,896


4.
COMMITMENTS AND CONTINGENCIES

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. There is no material litigation nor to management's knowledge is any material litigation currently threatened against the Property other than routine litigation, claims and administrative proceedings arising in the ordinary course of business.

5.
MANAGEMENT AGREEMENT

In connection with the management of the rental operations, a property management fee was paid to an unrelated third party, which was calculated as 3.0% of gross cash receipts plus $1,250 per quarter. Property management fees of $147,655 (unaudited) and $182,367 were recorded for the nine-month period ended September 30, 2016 and the year ended December 31, 2015, respectively.

6.    CONCENTRATION OF RISK

The Champions Village property is located in Houston, Texas and is subject to the risks of real property ownership and local and national economic growth trends.

Champions Village earned approximately 10.8% of its base rent revenue from its anchor tenant for the year ended December 31, 2015. The loss of this tenant could have a significant negative impact on operations.

F- 5



UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

    
The Company’s unaudited pro forma condensed consolidated balance sheet at September 30, 2016 illustrates the estimated effects of the purchase of the Champions Village property referred to in Item 8.01 above (the Transaction) as if it had occurred on such date.

The accompanying unaudited pro forma condensed consolidated statements of operations of the Company are presented for the nine months ended September 30, 2016 and the year ended December 31, 2015 (the "Pro Forma Periods"), and illustrate the estimated effect of the Transaction as if it had occurred on January 1, 2015.
 
This unaudited pro forma condensed consolidated financial information is presented for informational purposes only and does not purport to be indicative of the Company's financial results as if the transactions reflected herein had occurred on the date or been in effect during the period indicated. This pro forma condensed consolidated financial information should not be viewed as indicative of the Company's financial results in the future and should be read in conjunction with the Company's financial statements as filed on Form 10-K for the year ended December 31, 2015 and on Form 10-Q for the interim period ended September 30, 2016.



F- 6



Preferred Apartment Communities, Inc.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
as of September 30, 2016
 
PAC REIT Historical
(See Note 1)
 
Acquired Champions Village (See Note 1)
 
PAC REIT
Pro Forma
Assets
 
 
 
 
 
Real estate
 
 
 
 
 
Land
$
260,222,888

 
$
12,812,546

A
$
273,035,434

Building and improvements
1,333,186,314

 
30,647,609

A
1,363,833,923

Tenant improvements
14,132,772

 
2,751,796

A
16,884,568

Furniture, fixtures, and equipment
125,292,571

 

 
125,292,571

Construction In progress
2,879,528

 

 
2,879,528

Gross real estate
1,735,714,073

 
46,211,951

 
1,781,926,024

Less: accumulated depreciation
(87,020,014
)
 

 
(87,020,014
)
Net real estate
1,648,694,059

 
46,211,951

 
1,694,906,010

Real estate loans, net of deferred fee income
195,971,159

 

 
195,971,159

Real estate loans to related parties, net
109,436,327

 

 
109,436,327

Total real estate and real estate loans, net
1,954,101,545

 
46,211,951

 
2,000,313,496

 
 
 
 
 
 
Cash and cash equivalents
10,462,384

 
(3,492,808
)
B
6,969,576

Restricted cash
32,948,161

 
1,316,883

A
34,265,044

Notes receivable
14,341,875

 

 
14,341,875

Note receivable and line of credit to related party
20,986,537

 

 
20,986,537

Accrued interest receivable on real estate loans
17,669,121

 

 
17,669,121

Acquired intangible assets, net of amortization
49,825,572

 
6,075,918

A
55,901,490

Deferred loan costs for revolving line of credit
1,738,508

 

 
1,738,508

Deferred offering costs
3,809,014

 

 
3,809,014

Tenant receivables and other assets
17,654,353

 
701,064

A
18,355,417

 
 
 
 
 
 
Total assets
$
2,123,537,070

 
$
50,813,008

 
$
2,174,350,078

 
 
 
 
 
 
Liabilities and equity
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
Mortgage notes payable, principal amount
$
1,183,335,433

 
$
27,400,000

B
$
1,210,735,433

Less: deferred loan costs, net of amortization
(19,317,090
)
 
(1,018,678
)
B
(20,335,768
)
Mortgage notes payable, net of deferred loan costs
1,164,018,343

 
26,381,322

 
1,190,399,665

Revolving line of credit
82,000,000

 
20,000,000

B
102,000,000

Term note payable
11,000,000

 

 
11,000,000

Less: deferred loan costs
(67,032
)
 

 
(67,032
)
Term note payable, net of deferred loan costs
10,932,968

 

 
10,932,968

Real estate loan participation obligation
19,638,232

 

 
19,638,232

Accounts payable and accrued expenses
25,309,813

 
1,154,889

A
26,464,702

Accrued interest payable
3,490,151

 

 
3,490,151

Dividends and partnership distributions payable
9,056,611

 

 
9,056,611

Acquired below market lease intangibles
19,180,354

 
3,017,960

A
22,198,314

Security deposits and other liabilities
5,161,358

 
258,837

A
5,420,195

Total liabilities
1,338,787,830

 
50,813,008

 
1,389,600,838

 
 
 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
Stockholder's equity
 
 
 
 
 
Series A Redeemable Preferred Stock, $0.01 par value per share;
 
 
 
 
 
1,050,000 shares authorized; 809,460 shares issued and
 
 
 
 
 
802,032 shares outstanding
8,020

 

 
8,020

Common Stock, $0.01 par value per share; 400,066,666 shares
 
 
 
 
 
authorized; 24,658,034 shares issued and outstanding
246,580

 

 
246,580

Additional paid-in capital
802,559,257

 

 
802,559,257

Accumulated deficit
(19,384,106
)
 

 
(19,384,106
)
Total stockholders' equity
783,429,751

 

 
783,429,751

Non-controlling interest
1,319,489

 

 
1,319,489

Total equity
784,749,240

 

 
784,749,240

 
 
 
 
 
 
Total liabilities and equity
$
2,123,537,070

 
$
50,813,008

 
$
2,174,350,078


The accompanying notes are an integral part of this pro forma condensed consolidated financial statement.

F- 7


Preferred Apartment Communities, Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the Nine Months Ended September 30, 2016

 
 
PAC REIT Historical
(See note 1)
 
Acquired Champions Village (See Note 1)
 
Other Pro Forma Adjustments
(See note 1)
 
PAC REIT
Pro Forma
Revenues:
 
 
 
 
 
 
 
Rental revenues
$
96,541,544

 
$
3,319,268

 
$
536,556

AA
$
100,397,368

Other property revenues
13,290,330

 
1,210,509

 

 
14,500,839

Interest income on loans and notes receivable
20,984,625

 

 

 
20,984,625

Interest income from related parties
10,310,563

 

 

 
10,310,563

Total revenues
141,127,062

 
4,529,777

 
536,556

 
146,193,395

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Property operating and maintenance
13,883,133

 
745,925

 

 
14,629,058

Property salary and benefits reimbursement to
 
 
 
 
 
 
 
related party
7,688,470

 

 

 
7,688,470

Property management fees
4,308,841

 
147,655

 
29,667

BB
4,486,163

Real estate taxes
15,457,134

 
881,722

 

 
16,338,856

General and administrative
3,255,728

 
29,302

 

 
3,285,030

Equity compensation to directors and
 
 
 
 
 
 
 
executives
1,867,706

 

 

 
1,867,706

Depreciation and amortization
54,981,064

 

 
2,558,703

CC
57,539,767

Acquisition and pursuit costs
6,179,442

 

 
(31,950
)
DD
6,147,492

Acquisition fees to related parties
706,422

 

 

 
706,422

Asset management fees to related party
9,484,161

 

 
296,248

EE
9,780,409

Insurance, professional fees and other expenses
4,216,838

 
113,667

 

 
4,330,505

Total operating expenses
122,028,939

 
1,918,271

 
2,852,668

 
126,799,878

Contingent asset management and general and
 
 
 
 
 
 
 
administrative expense fees
(1,458,245
)
 

 

 
(1,458,245
)
 
 
 
 
 
 
 
 
Net operating expenses
120,570,694

 
1,918,271

 
2,852,668

 
125,341,633

 
 
 
 
 
 
 
 
Operating income (loss)
20,556,368

 
2,611,506

 
(2,316,112
)
 
20,851,762

Interest expense
30,688,505

 

 
1,365,996

FF
32,054,501

 
 
 
 
 
 
 
 
Net (loss) income before gain on real estate
(10,132,137
)
 
2,611,506

 
(3,682,108
)
 
(11,202,739
)
Gain on sale of real estate, net of disposition expenses
4,271,506

 

 

 
4,271,506

Net (loss) gain
(5,860,631
)
 
2,611,506

 
(3,682,108
)
 
(6,931,233
)
Consolidated net loss attributable to
 
 
 
 
 
 


non-controlling interests
175,045

 

 
52,834

GG
227,879

 

 
 
 
 
 
 
Net (loss) income attributable to the Company
(5,685,586
)
 
2,611,506

 
(3,629,274
)
 
(6,703,354
)
 

 
 
 
 
 
 
Dividends declared to Series A preferred
 
 
 
 
 
 
 
stockholders
(28,341,723
)
 

 

 
(28,341,723
)
Earnings attributable to unvested restricted stock
(12,434
)
 

 

 
(12,434
)
 
 
 
 
 
 
 
 
Net loss attributable to common stockholders
$
(34,039,743
)
 
$
2,611,506

 
$
(3,629,274
)
 
$
(35,057,511
)
 

 
 
 
 
 
 
Net loss per share of Common Stock available to
 
 
 
 
 
 
 
common stockholders, basic and diluted
$
(1.45
)
 
 
 
 
 
$
(1.49
)
 

 
 
 
 
 
 
Weighted average number of shares of Common
 
 
 
 
 
 
 
Stock outstanding, basic and diluted
23,552,951

 
 
 
 
 
23,552,951



The accompanying notes are an integral part of this pro forma condensed consolidated financial statement.

F- 8


Preferred Apartment Communities, Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended December 31, 2015


 
PAC REIT Historical
(See note 1)
 
Acquired Champions Village (See Note 1)
 
Other Pro Forma Adjustments
(See note 1)
 
PAC REIT
Pro Forma
Revenues:
 
 
 
 
 
 
 
Rental revenues
$
69,128,280

 
$
4,475,842

 
$
798,437

AA
$
74,402,559

Other property revenues
9,495,522

 
1,588,565

 

 
11,084,087

Interest income on loans and notes receivable
23,207,610

 

 

 
23,207,610

Interest income from related parties
7,474,100

 

 

 
7,474,100

Total revenues
109,305,512

 
6,064,407

 
798,437

 
116,168,356

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Property operating and maintenance
10,878,872

 
694,378

 

 
11,573,250

Property salary and benefits reimbursement to related
 
 
 
 
 
 
 
party
5,885,242

 

 

 
5,885,242

Property management fees
3,014,801

 
182,367

 
49,361

BB
3,246,529

Real estate taxes
9,934,412

 
1,162,316

 

 
11,096,728

General and administrative
2,285,789

 
46,736

 

 
2,332,525

Equity compensation to directors and executives
2,362,453

 

 

 
2,362,453

Depreciation and amortization
38,096,334

 

 
4,071,806

CC
42,168,140

Acquisition and pursuit costs
4,186,092

 

 

 
4,186,092

Acquisition fees to related parties
4,967,671

 

 

 
4,967,671

Asset management fees to related party
7,041,226

 

 
392,312

DD
7,433,538

Insurance, professional fees and other expenses
3,568,356

 
65,710

 

 
3,634,066

Total operating expenses
92,221,248

 
2,151,507

 
4,513,479

 
98,886,234

Asset management and general and administrative
 
 
 
 
 
 
 
expense fees deferred
(1,805,478
)
 
 
 

 
(1,805,478
)
 
 
 
 
 
 
 
 
Net operating expenses
90,415,770

 
2,151,507

 
4,513,479

 
97,080,756

 
 
 
 
 
 
 
 
Operating income (loss)
18,889,742

 
3,912,900

 
(3,715,042
)
 
19,087,600

Interest expense
21,315,731

 

 
1,823,247

EE
23,138,978

 
 
 
 
 
 
 
 
Net (loss) income
(2,425,989
)
 
3,912,900

 
(5,538,289
)
 
(4,051,378
)
Consolidated net loss attributable to
 
 
 
 
 
 
 
non-controlling interests
25,321

 

 
27,917

FF
53,238

 
 
 
 
 
 
 
 
Net (loss) income attributable to the Company
(2,400,668
)
 
3,912,900

 
(5,510,372
)
 
(3,998,140
)
 
 
 
 
 
 
 
 
Dividends declared to Series A preferred stockholders
(18,751,934
)
 

 

 
(18,751,934
)
Earnings attributable to unvested restricted stock
(19,256
)
 

 

 
(19,256
)
 
 
 
 
 
 
 
 
Net (loss) income attributable to common stockholders
$
(21,171,858
)
 
$
3,912,900

 
$
(5,510,372
)
 
$
(22,769,330
)
 
 
 
 
 
 
 
 
Net loss per share of Common Stock available to
 
 
 
 
 
 
 
common stockholders, basic and diluted
$
(0.95
)
 
 
 
 
 
$
(1.03
)
 
 
 
 
 
 
 
 
Weighted average number of shares of Common Stock
 
 
 
 
 
 
outstanding, basic and diluted
22,182,971

 
 
 
 
 
22,182,971


The accompanying notes are an integral part of this pro forma condensed consolidated financial statement.


F- 9


Preferred Apartment Communities, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

1.    Basis of Presentation

Preferred Apartment Communities, Inc. was formed as a Maryland corporation on September 18, 2009, and elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code, effective with its tax year ended December 31, 2011. Unless the context otherwise requires, references to the "Company", "we", "us", or "our" refer to Preferred Apartment Communities, Inc., together with its consolidated subsidiaries, including Preferred Apartment Communities Operating Partnership, L.P., or the Operating Partnership. The Company was formed primarily to acquire and operate multifamily properties in select targeted markets throughout the United States. As part of its business strategy, the Company may enter into forward purchase contracts or purchase options for to-be-built multifamily communities and may make mezzanine loans, provide deposit arrangements, or provide performance assurances, as may be necessary or appropriate, in connection with the development of multifamily communities and other properties. As a secondary strategy, the Company 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 its 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 its Manager (as defined below) as appropriate for the Company. The Company is externally managed and advised by Preferred Apartment Advisors, LLC, or its Manager, a Delaware limited liability company and a related party.

On October 18, 2016, the Company acquired a grocery-anchored shopping center in Houston, Texas ("Champions Village").

The Unaudited Pro Forma Condensed Consolidated Balance Sheet includes three columns.  The first column labeled "PAC REIT Historical" represents the actual financial position of the Company as of September 30, 2016. The second column, entitled "Acquired Champions Village" represents the pro forma adjustments required in order to reflect the balance sheet impact of the addition of the Property as if the acquisition had occurred on September 30, 2016, including the new mortgage financing. The third column, entitled "PAC REIT Pro Forma" presents the combined pro forma condensed consolidated balance sheet of the Company as of September 30, 2016, as described in note 2.

The Unaudited Pro Forma Condensed Consolidated Statement of Operations for the nine-month period ended September 30, 2016 includes four columns. The first column labeled "PAC REIT Historical" represents the actual results of operations of the Company for the nine months ended September 30, 2016. The second column, entitled "Acquired Champions Village" represents the historical revenues and operating expenses of the Property for the nine-month period ended September 30, 2016. The third column, entitled "Other Pro Forma Adjustments" represents the pro forma adjustments required to reflect the acquired Property as described in note 3. The fourth column, entitled "PAC REIT pro forma" presents the combined pro forma results of operations of the Company for the nine months ended September 30, 2016.

The Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 2015 also includes four columns and follows the same approach described above.

The results presented on the Unaudited Pro Forma Condensed Consolidated Statements of Operations assume the acquisition closed on January 1, 2015 and present pro forma operating results for the nine months ended September 30, 2016 and the year ended December 31, 2015. These Unaudited Pro Forma Condensed Consolidated Statements of Operations should not be considered indicative of future results.

2.      Adjustments to Unaudited Pro Forma Condensed Consolidated Balance Sheet

(A)     The Company allocated the purchase price of Champions Village 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, but is preliminary and is subject to refinement for a period of up to one year from the closing of the acquisition.

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Preferred Apartment Communities, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

 
Champions Village
Land
$
12,812,546

Building
28,392,601

Site Improvements
2,255,008

Tenant Improvements
2,751,796

Restricted cash
1,316,883

Above Market Leases
765,811

In Place - Leasing and Legal Costs
1,026,347

In Place - Forgone Rent/Expense
4,283,760

Other assets / prepaids
701,064

Accounts payable and accrued expenses
(1,154,889
)
Below Market Leases
(3,017,960
)
Security deposits, prepaid rents and other liabilities
(258,837
)
 
 
Net assets acquired
$
49,874,130


The fair value of the building was estimated on an as-if-vacant basis, based on relevant information obtained in connection with the acquisition of these properties and is to be depreciated on a straight-line basis over its estimated remaining useful life of 40 years. The estimated fair value of acquired in-place leases are estimates of the costs the Company would have incurred to lease the property to the occupancy level of the properties at the dates of acquisition. Tenant improvements, in-place leases and above-market and below-market leases are all depreciated or amortized over the remaining individual non-cancelable lease terms.

(B)    The Company financed the acquisition of Champions Village with a combination of new mortgage indebtedness, a draw on its revolving line of credit (see note 3.FF on the following page) and with cash on hand. The deferred loan origination costs are to be amortized over the lives of the loans using the effective interest method and include a loan coordination fee of $394,560, which was paid to the Company's Manager. The pro forma adjustment to cash was calculated as follows:

Proceeds from mortgage debt financing
 
$
27,400,000

Proceeds from draw on revolving line of credit
 
20,000,000

less:
 
 
Purchase price
 
(49,874,130
)
Loan coordination fees
 
(394,560
)
Deferred loan costs
 
(624,118
)
 
 
 
Net cash adjustment
 
$
(3,492,808
)

3.     Adjustments to Unaudited Pro Forma Condensed Consolidated Statements of Operations
 
The adjustments to the Unaudited Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 2016 are as follows:

(AA)    Reflected in the pro forma adjustment is the Company's estimate of the amount of below-market retail leases which are to be amortized into income over the actual underlying lease terms.

(BB)    Effective with the purchase of Champions Village by the Company, property management was assumed by an unaffiliated third party and the property management fee will be calculated as 3.5% of monthly gross rental income. The pro forma adjustment reflects this additional cost burden on the acquired property's operations.    

(CC)    Reflected in the pro forma adjustment is the Company's estimate of the depreciation and amortization

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Preferred Apartment Communities, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

charges that would have been incurred by Champions Village. The adjustments utilize a straight-line depreciation method using 40 year remaining useful lives for the building, and over the non-cancelable remaining individual lease terms ranging from one month to 10 years for tenant improvements, in-place leases, and above-market and below market lease intangibles.
    
(DD)    The Company had recorded due diligence costs related to Champions Village during the nine months ended September 30, 2016 of approximately $32,000. These costs are removed for pro forma purposes.

(EE)    The estimated asset management fee is based on 0.5% of the total value of the Company's assets based on their adjusted cost before reduction for depreciation, amortization, impairment charges and cumulative acquisition costs charged to expense in accordance with GAAP (adjusted cost will include the purchase price, acquisition expenses, capital expenditures and other customarily capitalized costs). In calculating the estimated asset management fee, the Company used the total acquired assets from Champions Village, as adjusted, plus the pro forma loan coordination fee and loan origination costs incurred. In addition, a similar adjustment is included for general and administrative expense fees, recorded as 2% of gross revenues of Champions Village for the nine months ended September 30, 2016.

(FF)    Reflected in the pro forma adjustment is the Company's estimate of interest expense on the $27.4 million of mortgage debt, the amortization of associated debt issuance costs, and interest accrued on the drawn proceeds from the Company's revolving line of credit of $20 million. The mortgage matures on November 1, 2021 and accrues interest at a variable rate of the greater of 3.25% or the monthly London Interbank Offered Rate ("1 Month LIBOR"), plus a spread of 3.0% per annum. The revolving line of credit bears interest at a rate of 1 Month LIBOR, plus a spread of 3.25% per annum. If 1 Month LIBOR were to fluctuate upward or downward by 1/8%, it would result in an increase or decrease in interest expense of approximately $33,000 for the pro forma nine month period ended September 30, 2016.
  
(GG)      Outstanding Class A Units of the Operating Partnership become entitled to pro-rata distributions of profit and allocations of loss as non-controlling interests of the Operating Partnership. The weighted-average percentage of ownership by the non-controlling interests was approximately 3.27% for the nine months ended September 30, 2016. This adjustment reflects the pro-rata adjustment to the amount of net income (loss) attributable to the non-controlling interests.
  
The adjustments to the Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 2015 are as follows:
 
(AA)    Reflected in the pro forma adjustment is the Company's estimate of the amount of below-market retail leases which are to be amortized into income over the actual underlying lease terms.

(BB)    Effective with the purchase of Champions Village by the Company, property management was assumed by an unaffiliated third party and the property management fee will be calculated as 3.5% of monthly gross rental income. The pro forma adjustment reflects this additional cost burden on the acquired property's operations.    

(CC)    Reflected in the pro forma adjustment is the Company's estimate of the depreciation and amortization charges that would have been incurred by Champions Village. The adjustments utilize a straight-line depreciation method using 40 year remaining useful lives for the building, and over the non-cancelable remaining individual lease terms ranging from one month to 10 years for tenant improvements, in-place leases, and above-market and below market lease intangibles.

(DD)          The estimated asset management fee is based on 0.5% of the total value of the Company's assets based on their adjusted cost before reduction for depreciation, amortization, impairment charges and cumulative acquisition costs charged to expense in accordance with GAAP (adjusted cost will include the purchase price, acquisition expenses, capital expenditures and other customarily capitalized costs). In calculating the estimated asset management fee, the Company used the total acquired assets from Champions

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Preferred Apartment Communities, Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

Village, as adjusted, plus the pro forma loan coordination fees and loan origination costs incurred. In addition, a similar adjustment is included for general and administrative expense fees, recorded as 2% of gross revenues of Champions Village for the year ended December 31, 2015.
  
(EE)    Reflected in the pro forma adjustment is the Company's estimate of interest expense on the $27.4 million of mortgage debt, the amortization of associated debt issuance costs, and interest accrued on the drawn proceeds from the Company's revolving line of credit of $20 million. The mortgage matures on November 1, 2021 and accrues interest at a variable rate of the greater of 3.25% or the monthly London Interbank Offered Rate ("1 Month LIBOR"), plus a spread of 3.0% per annum. The revolving line of credit bears interest at a rate of 1 Month LIBOR, plus a spread of 3.25% per annum. If 1 Month LIBOR were to fluctuate upward or downward by 1/8%, it would result in an increase or decrease in interest expense of approximately $34,000 for the pro forma twelve-month period ended December 31, 2015.

(FF)      Outstanding Class A Units of the Operating Partnership become entitled to pro-rata distributions of profit and allocations of loss as non-controlling interests of the Operating Partnership. The weighted-average percentage of ownership by the non-controlling interests was approximately 1.24% for the twelve months ended December 31, 2015. This adjustment reflects the pro-rata adjustment to the amount of net income (loss) attributable to the non-controlling interests.



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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 
PREFERRED APARTMENT COMMUNITIES, INC.
(Registrant)

Date: February 6, 2017
By:
 /s/ Jeffrey R. Sprain
 
 
Jeffrey R. Sprain
 
 
General Counsel and Secretary