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~~March 31, 2020


¨	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~~May 8, 2020 was ~~45,812,502.~~47,585,239.



PART I - FINANCIAL INFORMATION

INDEX


Item 1.	Financial Statements	Page No.

	Condensed Consolidated Balance Sheets (unaudited) – as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~ 2019	2

	Condensed Consolidated Statements of Operations (unaudited) – Three Months Ended March 31, 2020 and ~~Nine Months Ended September 30,~~ 2019 ~~and 2018~~	3

	Condensed Consolidated Statements of Stockholders' Equity (unaudited) – Three Months Ended March 31, 2020 and ~~Nine Months Ended September 30,~~ 2019 ~~and 2018~~	4

	Condensed Consolidated Statements of Cash Flows (unaudited) – ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	6

	Notes to Condensed Consolidated Financial Statements (unaudited)	8

	~~Notes to Condensed Consolidated Financial Statements (unaudited)~~	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5141

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	7764

Item 4.	Controls and Procedures	7864

PART II - OTHER INFORMATION		78

Item 1.	Legal Proceedings	7866

Item 1A.	Risk Factors	7866

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7867

Item 3.	Defaults Upon Senior Securities	7867

Item 4.	Mine Safety Disclosures	7867

Item 5.	Other Information	7967

Item 6.	Exhibits	7968

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



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

(In thousands, except per-share par values)	March 31, 2020			December 31, 2019
Assets
Real estate
Land	$	665,585		$	635,757
Building and improvements	3,329,579			3,256,223
Tenant improvements	172,136			167,275
Furniture, fixtures, and equipment	341,542			323,381
Construction in progress	16,131			11,893
Gross real estate	4,524,973			4,394,529
Less: accumulated depreciation	(461,957		)	(421,551		)
Net real estate	4,063,016			3,972,978
Real estate loan investments, net of deferred fee income of $1,500 and $1,460 and allowance for expected
loan loss of $9,796 and $0	292,905			325,790
Real estate loan investments to related parties, net of deferred fee income of $0 and $16, allowance for expected
loan loss of $2,148 and $0 and allowance for doubtful accounts of $1,400 and $1,400	2,568			23,692
Total real estate and real estate loan investments, net	4,358,489			4,322,460

Cash and cash equivalents	120,128			94,381
Restricted cash	43,665			42,872
Notes receivable	7,321			17,079
Note receivable and revolving lines of credit due from related parties	9,011			24,838
Accrued interest receivable on real estate loans	20,186			25,755
Acquired intangible assets, net of amortization of $159,330 and $149,896	154,351			154,803
Deferred loan costs on Revolving Line of Credit, net of amortization of $1,017 and $849	1,118			1,286
Deferred offering costs	3,085			2,147
Tenant lease inducements, net of amortization of $4,007 and $3,567	19,168			19,607
Tenant receivables and other assets	90,877			65,332

Total assets	$	4,827,399		$	4,770,560

Liabilities and equity
Liabilities
Mortgage notes payable, net of deferred loan costs and mark-to-market adjustment of $42,739 and $42,807	$	2,606,251		$	2,567,022
Revolving line of credit	191,500			—
Term note payable, net of deferred loan costs of $0 and $511	—			69,489
Unearned purchase option termination fees	2,019			2,859
Deferred revenue	38,782			39,722
Accounts payable and accrued expenses	43,797			42,191
Deferred liability to Former Manager	22,982			—
Contingent liability due to Former Manager	14,911			—
Accrued interest payable	8,707			8,152
Dividends and partnership distributions payable	24,415			23,519
Acquired below market lease intangibles, net of amortization of $26,144 and $23,655	60,481			62,611
Prepaid rent, security deposits, and other liabilities	35,405			20,879
Total liabilities	3,049,250			2,836,444

Commitments and contingencies (Note 11)

Equity
Stockholders' equity
Series A Redeemable Preferred Stock, $0.01 par value per share; 3,050 shares authorized; 2,226 and 2,161 shares
issued; 2,075 and 2,028 shares outstanding at March 31, 2020 and December 31, 2019, respectively	21			20
Series A1 Redeemable Preferred Stock, $0.01 par value per share; up to 1,000 shares authorized; 37 and 5 shares
issued and outstanding at March 31, 2020 and December 31, 2019, respectively	—			—
Series M Redeemable Preferred Stock, $0.01 par value per share; 500 shares authorized; 106 shares issued;
98 and 103 shares outstanding at March 31, 2020 and December 31, 2019, respectively	1			1
Series M1 Redeemable Preferred Stock, $0.01 par value per share; up to 1,000 shares authorized; 2 and zero shares
issued and outstanding at March 31, 2020 and December 31, 2019, respectively	—			—
Common Stock, $0.01 par value per share; 400,067 shares authorized; 47,129 and 46,443 shares issued and
outstanding at March 31, 2020 and December 31, 2019, respectively	476			464
Additional paid-in capital	1,969,534			1,938,057
Accumulated (deficit) earnings	(191,040		)	(7,244		)
Total stockholders' equity	1,778,992			1,931,298
Non-controlling interest	(843		)	2,818
Total equity	1,778,149			1,934,116

Total liabilities and equity	$	4,827,399		$	4,770,560

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



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

(In thousands, except per-share figures)	Three months ended March 31,
	2020			2019
Revenues:
Rental and other property revenues	$	111,866		$	94,393
Interest income on loans and notes receivable	13,439			11,288
Interest income from related parties	2,537			5,802
Miscellaneous revenues	3,260			23
Total revenues	131,102			111,506

Operating expenses:
Property operating and maintenance	16,800			12,879
Property salary and benefits (including reimbursements of $1,430
and $4,079 to related party)	5,191			4,657
Property management fees (including $894 and $2,467 to related parties)	2,003			3,267
Real estate taxes and insurance	15,525			14,090
General and administrative	6,364			1,420
Equity compensation to directors and executives	230			311
Depreciation and amortization	49,509			45,289
Asset management and general and administrative expense fees to related party	3,099			7,829
Provision for expected credit losses	5,133			—
Management internalization expense	178,793			45
Total operating expenses	282,647			89,787

Waived asset management and general and administrative expense fees	(1,136		)	(2,629		)

Net operating expenses	281,511			87,158

Operating (loss) income before gain on sale of trading investment	(150,409		)	24,348
Gain on sale of trading investment	—			4
Operating (loss) income	(150,409		)	24,352
Interest expense	29,593			26,756
Change in fair value of net assets of consolidated VIEs from mortgage-backed pools	—			141
Loss on extinguishment of debt	—			(17		)
Gain on land condemnation	479			—

Net loss	(179,523		)	(2,280		)
Consolidated net loss (income) attributable to non-controlling interests	3,141			(492		)

Net loss attributable to the Company	(176,382		)	(2,772		)

Dividends declared to preferred stockholders	(33,068		)	(25,539		)
Earnings attributable to unvested restricted stock	(2		)	(2		)

Net loss attributable to common stockholders	$	(209,452	)	$	(28,313	)

Net loss per share of Common Stock available
to common stockholders, basic and diluted	$	(4.44	)	$	(0.66	)

Weighted average number of shares of Common Stock outstanding,
basic and diluted	47,129			42,680

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



Preferred Apartment Communities, Inc.
Consolidated Statements of Stockholders' Equity
For the three-month periods ended March 31, 2020 and 2019

(In thousands, except dividend per-share figures)	Series A, Series A1, Series M and Series M1 Redeemable Preferred Stock		Common Stock		Additional Paid in Capital			Accumulated Earnings			Total Stockholders' Equity			Non-Controlling Interest			Total Equity

Balance at January 1, 2020	$	21	$	464	$	1,938,057		$	(7,244	)	$	1,931,298		$	2,818		$	1,934,116
Cumulative adjustment to reflect the adoption of ASU 2016-13	—		—		—			(7,414		)	(7,414		)	—			(7,414		)
Issuance of Series A preferred shares	1		—		64,483			—			64,484			—			64,484
Issuance of Series A1/M1 preferred shares	—		—		34,069			—			34,069			—			34,069
Exercise of warrants	—		—		8			—			8			—			8
Redemptions of Series A preferred stock	—		11		(9,911		)	—			(9,900		)	—			(9,900		)
Syndication and offering costs	—		—		(12,360		)	—			(12,360		)	—			(12,360		)
Equity compensation to executives and directors	—		—		156			—			156			—			156
Conversion of Class A to common stock	—		1		1,104			—			1,105			(1,105		)	—
Current period amortization of Class B Units	—		—		—			—			—			74			74
Net income (loss)	—		—		—			(176,382		)	(176,382		)	(3,141		)	(179,523		)
Contributions from minority holders	—		—		—			—			—			201			201
Reallocation of minority interest in PAC OP	—		—		(513		)	—			(513		)	513			—
Distributions to minority holders	—		—		—			—			—			(203		)	(203		)
Dividends to Series A preferred stockholders
($5.00 per share per month)	—		—		(31,100		)	—			(31,100		)	—			(31,100		)
Dividends to mShares preferred stockholders
($4.79 - $6.25 per share per month)	—		—		(1,746		)	—			(1,746		)	—			(1,746		)
Dividends to Series A1/M1 preferred stockholders
($5.00 and $5.08 - $5.92 per share per month, respectively)	—		—		(222		)	—			(222		)	—			(222		)
Dividends to common stockholders ($0.2625 per share)	—		—		(12,491		)	—			(12,491		)	—			(12,491		)
Balance at March 31, 2020	$	22	$	476	$	1,969,534		$	(191,040	)	$	1,778,992		$	(843	)	$	1,778,149

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)
Consolidated Statements of Stockholders' Equity, continued																				Consolidated Statements of Stockholders' Equity, continued
For the three-month periods ended March 31, 2020 and 2019																				For the three-month periods ended March 31, 2020 and 2019

(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				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
Balance at January 1, 2019																					$	16	$	418	$	1,607,712		$	—		$	1,608,146		$	1,239		$	1,609,385
Issuance of Units	3		—		311,719			—			311,722			—			311,722				2		—		128,680			—			128,682			—			128,682
Issuance of mShares	—		—		21,768			—			21,768			—			21,768				—		—		12,472			—			12,472			—			12,472
Redemptions of Series A Preferred Stock	—		11		(9,112		)	—			(9,101		)	—			(9,101		)		—		10		(2,015		)	—			(2,005		)	—			(2,005		)
Exercises of Warrants	—		10		12,943			—			12,953			—			12,953				—		3		4,245			—			4,248			—			4,248
Syndication and offering costs	—		—		(32,043		)	—			(32,043		)	—			(32,043		)		—		—		(14,281		)	—			(14,281		)	—			(14,281		)
Equity compensation to executives and directors	—		—		413			—			413			—			413				—		—		159			—			159			—			159
Conversion of Class A Units to Common Stock	—		1		870			—			871			(871		)	—				—		1		526			—			527			(527		)	—
Current period amortization of Class B Units	—		—		—			—			—			2,468			2,468				—		—		—			—			—			152			152
Net income	—		—		—			16,883			16,883			456			17,339				—		—		—			(2,772		)	(2,772		)	492			(2,280		)
Reallocation adjustment to non-controlling interests	—		—		3,571			—			3,571			(3,571		)	—				—		—		818			—			818			(818		)	—
Distributions to non-controlling interests	—		—		—			—			—			(813		)	(813		)		—		—		—			—			—			(229		)	(229		)
Dividends to Series A preferred stockholders
($5.00 per share per month)	—		—		(40,655		)	(20,913		)	(61,568		)	—			(61,568		)		—		—		(27,418		)	2,685			(24,733		)	—			(24,733		)
Dividends to mShares preferred stockholders
($4.79 - $6.25 per share per month)	—		—		(814		)	(419		)	(1,233		)	—			(1,233		)		—		—		(893		)	87			(806		)	—			(806		)
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
Dividends to common stockholders ($0.26 per share)																					—		—		(11,195		)	—			(11,195		)	—			(11,195		)
Balance at March 31, 2019																					$	18	$	432	$	1,698,810		$	—		$	1,699,260		$	309		$	1,699,569

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

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

(In thousands)		Nine Months Ended September 30,						Three-month periods ended March 31,
		2019			2018			2020			2019
Operating activities:
Net (loss) income		$	(6,094	)	$	17,339		$	(179,523	)	$	(2,280	)
Reconciliation of net (loss) income to net cash provided by operating activities:
Depreciation and amortization expense		137,191			127,210			49,509			45,289
Amortization of above and below market leases		(4,525		)	(4,297		)	(1,705		)	(1,436		)
Deferred revenues and fee income amortization		(4,024		)	(3,103		)	(1,269		)	(1,498		)
Purchase option termination fee amortization	Purchase option termination fee amortization	(6,900		)	(6,554		)	(4,040		)	(4,233		)
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
Amortization of equity compensation, lease incentives, and other noncash expenses								849			805
Deferred loan cost amortization		4,752			5,213			1,781			1,552
(Increase) in accrued interest income on real estate loan investments		(7,888		)	(4,385		)	(3,296		)	(3,551		)
Equity compensation to executives and directors		922			2,881
Gains on sales of real estate and trading investment		(4		)	(38,961		)
Receipt of accrued interest income on real estate loans								8,865			—
Gain on sale of trading investment								—			(4		)
Gain on land condemnation, net of expenses								(479		)	—
Cash received for purchase option terminations		1,330			5,100			4,800			1,330
Loss on extinguishment of debt		84			—			—			17
Gain on sale of real estate loan investments, net		(747		)	—
Non-cash payment of interest on related party line of credit		(637		)	—
Increase in provision for expected credit losses								5,133			—
Mortgage interest received from consolidated VIEs		13,398			3,429			—			2,598
Mortgage interest paid to other participants of consolidated VIEs		(13,398		)	(3,429		)	—			(2,598		)
Loan loss allowance		—			3,029
Changes in operating assets and liabilities:
(Increase) in tenant receivables and other assets		(12,379		)	(3,518		)	(10,775		)	(8,376		)
(Increase) in tenant lease incentives	(Increase) in tenant lease incentives	(570		)	(6,786		)	—			(102		)
Increase in accounts payable and accrued expenses		22,399			14,470			24,190			1,290
Increase in accrued interest, prepaid rents and other liabilities		730			3,369
Increase in deferred liability to Former Manager								22,851			—
Increase in Contingent liability								15,000			—
Decrease in accrued interest, prepaid rents and other liabilities								(1,282		)	(2,441		)
Net cash provided by operating activities		124,436			111,974			(69,391		)	26,362

Investing activities:
Investments in real estate loans		(74,668		)	(145,413		)	(11,631		)	(29,795		)
Repayments of real estate loans		—			141,729			53,896			—
Notes receivable issued		(5,399		)	(5,949		)	(249		)	(1,890		)
Notes receivable repaid		2,169			8,941			10,041			—
Note receivable issued to and draws on line of credit by related parties		(30,434		)	(39,377		)	(9,624		)	(13,952		)
Repayments of line of credit by related parties		26,222			28,566
Proceeds from sale of real estate loan investment, net		747			—
Repayments of notes receivable and lines of credit by related parties								4,546			8,330
Origination fees received on real estate loan investments	Origination fees received on real estate loan investments	1,347			2,919			267			801
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		)	—
Origination fees paid to Former Manager on real estate loan investments								—			(401		)
Purchases of mortgage backed securities (K program), net of acquisition costs								—			(30,934		)
Mortgage principal received from consolidated VIEs	Mortgage principal received from consolidated VIEs	5,024			705			—			679
Purchases of mortgage-backed securities		(12,278		)	(4,739		)
Proceeds from sales of mortgage-backed securities	Proceeds from sales of mortgage-backed securities	53,445			—			—			53,445
Acquisition of properties		(442,415		)	(662,918		)	(125,107		)	(32,540		)
Disposition of properties, net		—			83,636
Receipt of insurance proceeds for capital improvements	Receipt of insurance proceeds for capital improvements	746			412			—			746
Proceeds from land condemnation								738			—
Additions to real estate assets - improvements		(34,251		)	(36,288		)	(12,817		)	(7,917		)
Deposits (paid) refunded on acquisitions		(952		)	3,552
Deposits (paid) on acquisitions								(915		)	(511		)
Net cash used in investing activities		(530,027		)	(625,683		)	(90,855		)	(53,939		)

Financing activities:
Proceeds from mortgage notes payable		329,905			386,559			81,413			57,275
Repayments of mortgage notes payable		(106,728		)	(66,875		)	(42,252		)	(38,324		)
Payments for deposits and other mortgage loan costs		(6,738		)	(7,150		)	(1,694		)	(996		)
Proceeds from real estate loan participants		—			5
Payments to real estate loan participants		(5,223		)	(4,372		)	—			(5,223		)
Proceeds from lines of credit		240,200			362,100			284,000			126,200
Payments on lines of credit		(247,200		)	(348,200		)	(92,500		)	(166,200		)
Repayment of the Term Loan		—			(11,000		)	(70,000		)	—
Mortgage principal paid to other participants of consolidated VIEs		(5,024		)	(705		)	—			(679		)
Proceeds from repurchase agreements		4,857			—


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




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

(In thousands)	Nine Months Ended September 30,						Three-month periods ended March 31,
	2019			2018			2020			2019
Proceeds from repurchase agreements							—			4,857
Repayments of repurchase agreements	(4,857		)	—			—			(4,857		)
Proceeds from sales of Units, net of offering costs	380,016			303,391
Proceeds from the sales of preferred stock and Units, net of offering costs							89,398			128,573
Proceeds from exercises of Warrants	9,875			16,553			44			3,921
Payments for redemptions of preferred stock	(7,995		)	(9,033		)	(9,890		)	(2,006		)
Common Stock dividends paid	(33,617		)	(29,488		)	(12,156		)	(10,840		)
Preferred stock dividends paid	(80,339		)	(61,093		)
Distributions to non-controlling interests	(686		)	(762		)
Dividends paid to preferred stock and Class A Unitholders							(32,732		)	(25,097		)
Payments for deferred offering costs	(3,386		)	(2,862		)	(7,042		)	(832		)
Contributions from non-controlling interests	2,050			—			197			—

Net cash provided by financing activities	465,110			527,068			186,786			65,772

Net increase in cash, cash equivalents and restricted cash	59,519			13,359			26,540			38,195
Cash, cash equivalents and restricted cash, beginning of year	87,690			73,012			137,253			87,690
Cash, cash equivalents and restricted cash, end of period	$	147,209		$	86,371		$	163,793		$	125,885


Supplemental cash flow information:
Cash paid for interest	$	76,563		$	62,207		$	27,190		$	24,318

Supplemental disclosure of non-cash investing and financing activities:
Accrued capital expenditures	$	3,952		$	2,379		$	5,552		$	7,308
Writeoff of fully depreciated or amortized assets and liabilities	$	210		$	1,768		$	—		$	158
Writeoff of fully amortized deferred loan costs	$	1,850		$	—		$	718		$	415
Lessee-funded tenant improvements, capitalized as landlord assets	$	—		$	11,796
Consolidation of assets of VIEs	$	270,669		$	—		$	—		$	544,869
Consolidation of liabilities of VIEs	$	270,669		$	—
Noncash extinguishment of notes receivable							$	20,865		$	—
Dividends payable - Common Stock	$	11,823		$	10,377		$	12,491		$	11,195
Dividends payable - Series A Preferred Stock	$	9,534		$	7,426		$	10,373		$	8,447
Dividends payable - mShares Preferred Stock	$	714		$	170		$	1,229		$	549
Dividends payable - A1/M1 Preferred Stock							$	138		$	—
Dividends declared but not yet due and payable	$	358		$	216		$	184		$	93
Partnership distributions payable to non-controlling interests	$	225		$	272		$	203		$	229
Accrued and payable deferred offering costs	$	252		$	322		$	880		$	740
Offering cost reimbursement to related party	$	384		$	1,438		$	40		$	465
Reclass of offering costs from deferred asset to equity	$	7,508		$	2,008		$	3,189		$	1,700
Loan receivables converted to equity for property acquisition	$	47,797		$	—		$	—		$	47,797
Fair value issuances of equity compensation	$	719		$	4,972		$	226		$	384
Mortgage loans assumed on acquisitions	$	41,550		$	47,125		$	—		$	41,550
Noncash repayment of mortgages through refinancings	$	65,607		$	37,485
Operating lease liabilities assumed from the Former Manager							$	15,912		$	—

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

Preferred Apartment Communities, Inc.

Notes to Condensed Consolidated Financial Statements

~~September 30, 2019~~March 31, 2020

(unaudited)


1.	Organization and Basis of Presentation

Preferred Apartment Communities, Inc. (NYSE: APTS) is a ~~Maryland corporation formed~~real estate investment trust engaged primarily ~~to own~~in the ownership and ~~operate~~operation of Class A multifamily properties, ~~and, to a lesser extent, own and operate student housing properties, grocery-anchored~~with select investments in grocery anchored shopping centers, ~~and strategically located, well leased class~~Class A office buildings, ~~all~~and student housing properties. Preferred Apartment Communities’ investment objective is to generate attractive, stable returns for stockholders by investing in ~~select targeted markets throughout~~income-producing properties and acquiring or originating real estate loans for multifamily properties. As of March 31, 2020, the Company owned or was invested in 123 properties in 15 states, predominantly in the Southeast region of 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 iswas externally managed and advised by Preferred Apartment Advisors, LLC, or its Former Manager, a Delaware limited liability company and related party until the Company acquired the Former Manager and NMP Advisors, LLC (the "Sub-Manager"), or the Internalization, on January 31, 2020. Prior to the Internalization transaction, according to the Sixth Amended and Restated Management Agreement, effective as of June 3, 2016, among the Company, the Operating Partnership, and the Former Manager, or the Former Management Agreement, the Company paid acquisition fees and other fees and expense reimbursements to the Former Manager. Following the Internalization transaction that closed on January 31, 2020, the Company no longer pays any fees or expense reimbursements to its Former Manager (see Note 6).

As of ~~September 30, 2019,~~March 31, 2020, the Company had ~~45,335,043~~47,578,631 shares of common stock, par value $0.01 per share, or Common Stock, issued and outstanding and was the approximate ~~98.2%~~98.4% owner of the Preferred Apartment Communities Operating Partnership, L.P., the Company's operating partnership, at that date. The number of partnership units not owned by the Company totaled ~~856,409~~774,687 at ~~September 30, 2019~~March 31, 2020 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~~controlled the Operating Partnership through its sole general partner interest and ~~conducts~~conducted substantially all of its business through the Operating Partnership until January 31, 2020. Beginning February 1, 2020, the Company conducts substantially all of its business through PAC Carveout, LLC, or Carveout, a wholly-owned subsidiary of the Operating Partnership. Carveout intends to elect 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, 2020. 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 indirect 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~~These condensed ~~balance sheet data was~~financial statements were derived from audited financial statements, but ~~does~~do not contain all the disclosures required by GAAP. These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the company’s Annual Report on Form 10-K for the year ended December 31, 2019. 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 results of operations for the three months ended March 31, 2020 and 2019, are not necessarily indicative of the results that may be expected for the full year. 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. During the first quarter of 2020, there was a global outbreak of a novel coronavirus, or COVID-19, that will continue to have an adverse impact on economic and market conditions and trigger a period of economic slowdown in the United States and globally. The potential reach, severity and duration of impacts of the COVID-19 pandemic will cause our estimates and forecasts of future events to be inherently less certain. 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.

108

Preferred Apartment Communities, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2020

(unaudited)

Reclassification Adjustments

The Company recorded certain reclassification adjustments on its Condensed Consolidated Statement of Operations for the three-month period ended March 31, 2019, to conform prior period presentation to the current presentation reflective of the internalized structure as shown in the table below. None of these reclassification adjustments were due to error or misstatement.



	For the three-month period ended March 31, 2019
	As reported in Quarterly Report on Form 10-Q at March 31, 2019		Reclassification adjustments			As reported in Quarterly Report on Form 10-Q at March 31, 2020
(in thousands)
Rental revenues	$	92,238	$	(92,238	)	$	—
Other property revenues	$	2,178	$	(2,178	)	$	—
Miscellaneous revenues	$	—	$	23		$	23

Rental and other property revenues	$	—	$	94,393		$	94,393

Operating expenses:
Property operating and maintenance	$	10,792	$	2,087		$	12,879
Real estate taxes	$	12,500	$	(12,500	)	$	—
Real estate taxes and insurance	$	—	$	14,090		$	14,090
General and administrative	$	2,614	$	(1,194	)	$	1,420
Insurance, professional fees and other expenses	$	2,528	$	(2,528	)	$	—
Management internalization expense	$	—	$	45		$	45

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements –- (continued)

~~September 30, 2019~~

~~(unaudited)~~

March 31, 2020


2.	Summary of Significant Accounting Policies

~~Variable Interest Entities~~Impairment Assessment

The Company evaluates its tangible and identifiable intangible real estate assets for impairment when events such as declines in a property’s operating performance, deteriorating market conditions, or environmental or legal concerns bring recoverability of the carrying value of one or more assets into question. When qualitative factors indicate the possibility of impairment, the total undiscounted cash flows of the property, including proceeds from disposition, are compared to the net book value of the property. If this test indicates that impairment exists, an impairment loss is recorded in earnings equal to the shortage of the book value to fair value, calculated as the discounted net cash flows of the property.

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 absorbCurrent expected credit 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’sreal estate loan 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 consistthat consists of drawn amounts on the loans, net of unamortized deferred loan origination fees and ~~loan loss allowances.~~current expected credit losses.

~~Interest income~~On January 1, 2020, the Company adopted ASU 2016-13, that replaced the incurred loss model with an expected loss model for instruments measured at amortized cost, and requires entities to record credit allowances for total expected future losses on financial assets at the outset of each loan. For each loan in which the Company is the lender, the amount of protection afforded to the Company is estimated to be the excess of the future estimated fair market value of the developed property over the developer’s related obligations (including the Company’s mezzanine or member loan(s)), other loans senior to the Company's, the expected future balance of accrued interest and any other obligations related to the project’s funding. The excess represents the amount of equity dollars in each real estate ~~loans and notes receivable~~project plus profit expected to be realized by the developer on the project, both of which are in a subordinate position to the Company's real estate loan investments. This numeric result is ~~recognized on an accrual basis over the lives~~expressed as a percentage of the ~~loans~~property's expected future fair value (a "loss reserve ratio"), which is then pooled into ranges of loss percentages that was derived from company-specific loss experience. The product of this indicated loss reserve ratio and the expected fully-funded balance (inclusive of an expected future balance of accrued interest) is the initial total expected credit loss reserve. Over the life of the loan, the initial reserve is reevaluated for potential reduction at the achievement of certain milestones in construction and lease-up progress as the project approaches completion and the loan approaches maturity, given no unforeseen degradation in project performance or ~~notes. In~~failure to adhere to the ~~event that a~~terms of the loan ~~or note is refinanced with~~by the ~~proceeds of another loan issued~~borrower/developer. Finally, the loss reserve may be further refined 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.~~any subjective qualitative factors deemed pertinent and worthy of reflection.

~~In connection with the surveillance review process, the Company’s~~

The Company implemented this new guidance by applying this model to its existing portfolio of real estate loan investments ~~are assigned an internal risk rating. The internal risk ratings are based~~using the modified retrospective method and in doing so, recorded a cumulative effect adjustment to retained earnings 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 theJanuary 1, 2020. See note 4.

~~Preferred Apartment Communities, Inc.~~

~~Notes to Consolidated Financial Statements – (continued)~~

~~September 30, 2019~~

~~(unaudited)~~

~~MSA, leasing status, rental rates, net operating income,~~The Company's notes and lines of credit receivable are unsecured and so are assessed for expected ~~free cash flow, and other factors management deems important related to~~future credit loss by individually assessing the ~~ultimate collectability~~expected profit from current development projects in progress, as well as the viability 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 appraisalpersonal guarantees 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.borrowers.

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.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements - (continued)

March 31, 2020

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 9nine to 15fifteen 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~~within the rental ~~fees~~ and ~~parking rental fees as well as non-lease components such as utility reimbursements were previously presented in~~other property revenues line on 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.~~of Operations. 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 10ten to 20twenty 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 5five to 15fifteen 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~~ rental and other property revenues

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements - (continued)

March 31, 2020

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,~~application fees, license fees, late fees and 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. In performing a detailed review of each tenant, we determined if the balances were paid in the subsequent month, if if the tenant had requested rent relief in the subsequent month due to COVID-19 circumstances, if the tenant was a credit tenant that was not typically late, and if the tenant had a security deposit on hand. If collection of substantially all of the outstanding balance is not probable, the tenant's rental revenue is recognized on a cash basis and all accrued balances are written off to rental revenue.

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~~Upon adoption of ASC 842, ~~on January 1, 2019,~~the Company began recording amounts not deemed probable of collection as a reduction of rental ~~revenues~~ and other property revenues, as applicable.

In April 2020, the FASB issued a question-and-answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of COVID-19. Under existing lease guidance, the Company would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated with the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A clarifies that entities may elect to not evaluate whether lease-related relief that lessors provide to mitigate the economic effects of COVID-19 on lessees is a lease modification under Topic 842, Leases. Instead, an entity that elects not to evaluate whether a concession directly related to COVID-19 is a modification can then elect whether to apply the modification guidance (i.e. assume the relief was always contemplated by the contract or assume the relief was not contemplated by the contract). Both lessees and lessors may make this election. The Company is evaluating its election on a disaggregated basis, with such election applied consistently to leases with similar characteristics and similar circumstances. The future impact of the Lease Modification Q&A is dependent upon the extent of lease concessions granted to tenants as a result of COVID-19 in future periods and the elections made by the Company at the time of entering into such concessions.

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.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements - (continued)

March 31, 2020

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. All of these leases qualify as operating leases. 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 20twenty 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 is also the lessee of office space for its corporate headquarters and of furniture and office equipment, which generally are three to five years in duration with minimal rent increases. 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~~Lease expense for ground leases and furniture and ~~equipment leases such as~~ office equipment ~~which generally~~located at the Company's properties is included in the consolidated statements of operations within property operations and maintenance and expense for office rent and furniture and office equipment in the Company's corporate headquarters are ~~three~~included in general and administrative expense. See note 12 for more disclosures related to ~~five years with minimal rent increases. The Company determined that~~ the ~~related~~Company's right of use ~~asset~~assets 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)~~

liabilities.

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 ("CECL") 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~~requires 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 Implementation of the new guidance on accounting for financial assets ~~will be~~was limited to our real estate ~~investment~~loan investments. We have developed a model that derives a reserve ratio based upon the amount of financial protection afforded each instrument. For each loan in which we are the lender, the amount of protection afforded to us is estimated to be the excess of the future estimated fair market value of the developed property over the commitment amount of each loan (including other loans senior to the Company’s), inclusive of accrued interest and ~~notes and revolving lines~~other related receivables. The excess represents the amount of ~~credit.~~equity dollars in each real estate project, which are in a subordinate position to our real estate loan investments. We ~~expect to implement~~implemented this new guidance using the modified retrospective basis by recording a cumulative effect adjustment to retained earnings on January 1, ~~2020.~~ 2020 of approximately $7.4 million.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements - (continued)

March 31, 2020



Standard	Description	Date of Adoption	Effect on the Consolidated Financial Statements
Recently Issued Accounting Guidance Not Yet Adopted
ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting	The new standard enables affected entities to elect from a series of practical expedients designed to ease the transition from referenced base rates within contracts designated to be replaced by Reference Rate Reform.	The amendments are effective March 12, 2020 through December 31, 2022.	ASU 2020-04 will potentially be applicable to the Company's variable-rate debt instruments for which the Company is the borrower, which bear interest at a spread over the 1-month London Interbank Offer Rate (1-month LIBOR). Among the practical expedients are the option to elect prospective adjustment of the effective interest rate, foregoing reassessment of any instruments under loan modification rules. The Company is monitoring developments pertaining to Reference Rate Reform and does not currently anticipate ASU 2020-04 to have a material effect on its results of operations.

3. Real Estate Assets

The Company's real estate assets consisted of:



	As of:
	March 31, 2020		December 31, 2019
Multifamily communities:
Properties⁽¹⁾	35	^{(1, 2)}	34
Units	10,637		10,245
New Market Properties:
Properties	54	⁽²⁾	52
Gross leasable area (square feet)⁽³⁾	6,208,278		6,041,629
Student housing properties:
Properties	8	⁽²⁾	8
Units	2,011		2,011
Beds	6,095		6,095
Preferred Office Properties:
Properties	9	^{(2, 4)}	10
Rentable square feet	3,169,000		3,204,000

⁽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 is the Regent at Lenox Village within the Lenox Portfolio.
⁽²⁾One multifamily community, two student housing properties, two grocery-anchored shopping centers and two office buildings are owned through consolidated joint ventures.
⁽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.
(4) Excludes our 251 Armour property, comprising 35,000 rentable square feet that is under development.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements - (continued)

March 31, 2020

Impacts of COVID-19 Pandemic

The COVID-19 pandemic emerged in December 2019 and has since spread globally, including to every state in the United States. On March 13, 2020, the United States declared a national emergency. Since that time, efforts to contain the spread of COVID-19 have intensified. Several countries, including the United States, have taken steps to restrict travel, temporarily close businesses and issue quarantine orders. The restrictions have resulted in impacts to earnings for commercial real estate, which in turn is expected to affect asset valuations to some degree. The Company does not consider this event to be a triggering event, since no evidence of declining valuations of any consequence have emerged to cause a triggering event, as evidenced by step one analyses performed on a sample of its properties from each segment. The Company found a significant amount of cushion between the asset’s book value and the undiscounted cash flows for the properties evaluated.

The Company's monthly rent collections for the three-month period ended March 31, 2020 have been approximately level across the Company's segments, with a minor dip in collections in March for in-line retail tenants, as such tenants are generally smaller operations that are likely have less access to adequate sources of liquidity to weather economic downturns than grocery anchor tenants and many office tenants. The closure of several in-line tenant businesses and monthly rent collections are beginning to fall. Within our multifamily communities, despite the fact that collections of rents had not yet begun to decline as of March 2020, the Company offered rent deferral plans for the months of April and May 2020. Any deferred rents would be due over the remaining lease term of the individual tenants. Any uncollected deferred rent amounts will be deemed uncollectible. For office tenants, the company evaluated all delinquent receivable balances by performing a detailed review of each tenant. In this review, we determined if the balances were paid in the subsequent month, if tenant had requested rent relief in the subsequent month due to COVID-19 circumstances, if the tenant was a credit tenant that was not typically late, and if the tenant had a security deposit on hand. If the likelihood of the tenant submitting payment was deemed to be less than probable based on the aforementioned criteria, we determined the tenant as being an “at risk” tenant and revenue would be recognized on a cash basis.

Multifamily communities acquired

During the three-month period ended March 31, 2020, the Company completed the acquisition of Altis Wiregrass Ranch, a 392-unit multifamily community located in Tampa, Florida.

The aggregate purchase price of the multifamily acquisition was approximately $84.0 million, exclusive of acquired escrows, security deposits, prepaids, capitalized acquisition costs and other miscellaneous assets and assumed liabilities. The Company acquired no multifamily communities during the three-month period ended March 31, 2019.

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)~~

31, 2020

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,						Multifamily Community acquired during the three-month period ended
(In thousands, except amortization period data)	2019			2018			March 31, 2020

Land	$	9,264		$	18,410		$	6,842
Buildings and improvements	87,098			116,767			57,186
Furniture, fixtures and equipment	19,806			27,905			15,522
Lease intangibles	2,647			5,681			4,595
Prepaids & other assets	75			238			24
Accrued taxes	(477		)	(684		)	(273		)
Security deposits, prepaid rents, and other liabilities	(118		)	(342		)	(318		)

Net assets acquired	$	118,295		$	167,975		$	83,578

Cash paid	$	78,295		$	55,015		$	83,578
Mortgage debt, net	40,000			112,960			—

Total consideration	$	118,295		$	167,975		$	83,578

Three months ended September 30, 2019:
Three-months ended March 31, 2020
Revenue	$	842		$	3,851		$	—
Net income (loss)	$	(522	)	$	(1,286	)	$	(240	)

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		$	171
Acquisition costs paid to related party (included above)	$	1,216		1,685			$	—
Remaining amortization period of intangible
assets and liabilities (months)	8.9			0			17.5

Student housing properties acquired

The Company had no acquisitions of student housing property assets during the three-month period ended March 31, 2020.

During the ~~nine-month periods~~three-month period ended ~~September 30,~~March 31, 2019, ~~and 2018,~~ the Company completed the ~~acquisitions~~acquisition of ~~the following student housing properties:~~Haven49, a 322-unit, 887-bed

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~~adjacent to the ~~nine-month period ended September 30, 2019 was approximately $92.4 million.~~University of North Carolina at Charlotte. The ~~aggregate purchase price~~Company effectuated the acquisition via

a negotiated agreement whereby the Company accepted the membership interest in the Haven49 project entity in satisfaction of

the ~~student housing property acquisitions for~~project indebtedness owed to the ~~nine-month~~Company. See Note 4.

1816

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements –- (continued)

~~September 30, 2019~~

~~(unaudited)~~March 31, 2020

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.

The Company allocated the ~~purchase prices~~asset's fair value 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.


	Student housing properties acquired during the nine-month periods ended September 30,						Student housing property acquired during the three-month period ended
(In thousands, except amortization period data)	2019			2018			March 31, 2019

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

Net assets acquired	$	90,664		$	198,303		$	90,664

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

Total consideration	$	90,664		$	198,303		$	90,664

Three-month period ended September 30, 2019:
Three-months ended March 31, 2019
Revenue	$	1,914		$	4,500		$	1,991
Net income (loss)	$	32		$	(1,260	)	$	94

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		$	1,016
Acquisition costs to related party	$	936		$	1,970
Acquisition costs paid to related party							$	936

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

Student housing properties

On ~~July 29, 2019,~~March 20, 2020, we ~~entered into~~delivered a ~~purchase and sale agreement~~written termination notice to ~~sell~~the prospective purchaser of six of our student housing properties for their failure to ~~a third party. A non-refundable~~consummate the purchase. Accordingly, we received an additional $2.75 million of forfeited 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.~~as liquidated damages.

1917

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements –- (continued)

~~September 30, 2019~~

~~(unaudited)~~

March 31, 2020

New Market Properties assets acquired

During the ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2020 and 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~~3/19/2020	~~Gayton~~Midway Market	Dallas, Texas	85,599
1/29/2020	Wakefield Crossing	~~Richmond, Virginia~~Raleigh, North Carolina	~~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~~75,927

			~~913,732~~161,526

~~4/27/2018~~1/17/2019	~~Greensboro Village~~Gayton Crossing	~~Nashville, Tennessee~~Richmond, Virginia	~~70,203~~158,316
~~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~~three-month periods ended ~~September 30,~~March 31, 2020 and 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~~$27.7 million and $29.0 million respectively, 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~~



	New Market Properties' acquisitions during the three-month periods ended March 31,
(In thousands, except amortization period data)	2020			2019

Land	$	9,328		$	9,109
Buildings and improvements	12,264			17,093
Tenant improvements	2,099			698
In-place leases	3,043			2,609
Above market leases	107			754
Leasing costs	1,237			769
Below market leases	(359		)	(1,515		)
Prepaid taxes and other assets	61			34
Security deposits, prepaid rents, and other	(249		)	(146		)

Net assets acquired	$	27,531		$	29,405

Cash paid	$	19,640		$	11,405
Mortgage debt	7,891			18,000

Total consideration	$	27,531		$	29,405

Three-month period ended March 31, 2020:
Revenue	$	408		$	691
Net income (loss)	$	45		$	(90	)

Three-month period ended March 31, 2019:
Revenue	$	—		$	595
Net income (loss)	$	—		$	(141	)

Capitalized acquisition costs incurred by the Company	$	470		$	569
Capitalized acquisition costs paid to related party (included above)	$	249		$	300
Remaining amortization period of intangible
assets and liabilities (years)	10.4			7.8

2118

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements –- (continued)

~~September 30, 2019~~

~~(unaudited)~~March 31, 2020

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)~~



	Three-month periods ended March 31,
(In thousands)	2020		2019
Depreciation:
Buildings and improvements	$	28,007	$	22,987
Furniture, fixtures, and equipment	12,388		13,133
	40,395		36,120
Amortization:
Acquired intangible assets	8,650		8,945
Deferred leasing costs	415		178
Website development costs	49		46
Total depreciation and amortization	$	49,509	$	45,289

At ~~September 30, 2019,~~March 31, 2020, the Company had recorded acquired gross intangible assets of ~~$288.5~~$313.7 million, accumulated amortization of ~~$140.9~~$159.3 million, gross intangible liabilities of ~~$74.7~~$86.6 million and accumulated amortization of ~~$21.7~~$26.1 million. Net intangible assets and liabilities as of ~~September 30, 2019~~March 31, 2020 will be amortized over the weighted average remaining amortization periods of approximately ~~7.6~~7.2 and ~~9.4~~9.1 years, respectively.

At ~~September 30, 2019,~~March 31, 2020, the Company had restricted cash of approximately ~~$17.6~~$20.7 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 May 7, 2018, the Company terminated its purchase options on the Bishop Street multifamily community and the Haven Charlotte student housing property, both of which were partially supported by real estate loan investments held by the Company, in exchange for termination fees aggregating approximately $5.6 million from the developers. For the three-month period ended March 31, 2019, the Company recorded approximately $3.1 million of interest revenue related to these purchase option terminations.

Effective January 1, 2019, the Company terminated its purchase options on the Sanibel ~~Straights,~~Straits, 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~~Company, in exchange ~~the Company will receive~~for termination fees aggregating approximately ~~$8.3~~$9.1 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~~The Company recorded approximately ~~$3.4~~$1.5 million and $1.2 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~~three-month periods ended March 31, 2020 and ~~Haven49~~2019, respectively. Effective March 6, 2020, the Company terminated its purchase ~~options that terminated in~~option on the ~~second quarter 2018.~~Falls at Forsyth multifamily community for $2.5 million.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements - (continued)

March 31, 2020

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

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


							March 31, 2020			December 31, 2019
Number of loans							24			27
Number of underlying properties in development							17			19
(In thousands)	September 30, 2019			December 31, 2018
Number of loans	21			19

Drawn amount	$	383,216		$	336,329		$	310,317		$	352,582
Deferred loan origination fees	(1,730		)	(2,118		)	(1,500		)	(1,476		)
Allowance for loan losses							(13,344		)	(1,400		)
Carrying value	$	381,486		$	334,211		$	295,473		$	349,706

Unfunded loan commitments	$	74,656		$	164,913		$	62,866		$	61,718
Weighted average current interest, per annum (paid monthly)	8.48		%	8.47		%	8.47		%	8.48		%
Weighted average accrued interest, per annum	3.66		%	5.24		%	3.54		%	3.85		%

(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)~~



(In thousands)	Principal balance			Deferred loan origination fees			Loan loss allowance			Credit Losses Reserve (CECL)			Carrying value
Balances as of December 31, 2019	$	352,582		$	(1,476	)	$	(1,400	)	$	—		$	349,706
Opening CECL reserve	—			—			—			(7,414		)	(7,414		)
Loan fundings	11,631			—			—			—			11,631
Loan repayments	(53,896		)	—			—			—			(53,896		)
Loan origination fees collected	—			(267		)	—			—			(267		)
Amortization of loan origination fees	—			243						—			243
Reductions in reserves due to loan repayments	—			—			—			245			245
Provision for credit losses	—			—			—			(4,775		)	(4,775		)
Balances as of March 31, 2020	$	310,317		$	(1,500	)	$	(1,400	)	$	(11,944	)	$	295,473


Property type	Number of loans	Carrying value		Commitment amount		Percentage of portfolio		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	%
Residential properties								23	$	289,616	$	353,989	98	%
New Market Properties	1	12,857		12,857		3	%	—	—		—		—	%
Preferred Office Properties	1	3,208		19,193		1	%	1	5,857		19,193		2	%
Balances as of September 30, 2019	21	$	381,486	$	457,871
Balances as of March 31, 2020								24	$	295,473	$	373,182

~~Effective June 30, 2019,~~On February 28, 2020, the Company ~~amended and sold its senior construction loan~~closed 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~~of up to approximately $13.4 million in partial support of a 256-unit multifamily community to be located in Charlotte, North Carolina. The loan pays a ~~loan participation agreement with an unaffiliated third party, under which the syndicate was to fund approximately 25%~~current monthly interest rate of ~~the loan commitment amount~~8.5% per annum and ~~collectively receive approximately 25%~~accrues additional deferred interest of ~~interest payments, returns of principal~~5.5% per annum 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 balancematures on ~~its consolidated balance sheet without reflection of any liability to any third party.~~February 28, 2025.

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.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements - (continued)

March 31, 2020

As discussed in note 2, the Company established total expected credit losses against its existing portfolio of real estate loan investments on January 1, 2020. In doing so, it recorded a cumulative effect reduction adjustment to retained earnings of approximately $7.4 million. For the quarter ended March 31, 2020, the Company recorded an aggregate net increase in its provision for expected credit losses of approximately $4.5 million.

As described in note 2, the Company assesses the credit quality of its real estate loan investments by a calculated loss reserve ratio, which is an internally-developed credit quality indicator. Loss reserve ratios reflect the amount of protection afforded by the amount of equity and debt financing subordinate to the Company's position in the project; higher reserve ratios reflect a lower amount of invested dollars junior to the Company's position. The following table presents the Company's aggregation of loan amounts by final reserve ratio as of March 31, 2020:



Final reserve ratio		Number of loans	Total amount due (in thousands)
0.50	%	3	$	56,904
1.00	%	1	6,370
1.50	%	9	109,735
3.00	%	2	28,992
4.00	%	1	125,778
36.26	%	1	5,924

		17	$	333,703

The COVID-19 pandemic has, and will continue to have, impacts upon the development activity underlying our real estate loan investments, including the availability of labor, the supply and availability of construction materials and the ability to achieve leased stabilization. The Company's Berryessa real estate loan investment carries a 4% final reserve ratio at March 31, 2020. The project is experiencing a temporary construction delay due to effects of the COVID-19 pandemic but is expected to resume shortly. The Company assesses its real estate loan investment portfolio for impacts from COVID-19 at the outset of the project, as well as both quantitatively and qualitatively at the achievement of construction and leasing milestones during the projects' lives.

The Company can make no assurances that economic or industry conditions or other circumstances will not lead to increases in allowances for credit losses.

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's Starkville loan has been in default since August 20, 2019 under the terms of the underlying mezzanine loan agreement. During the fourth quarter of 2019, 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 futurerecorded a specific loan loss ~~allowances.~~

~~At September 30, 2019,~~reserve related to this loan totaling $1.4 million, reducing its net investment in the ~~Company's portfolio~~Starkville loan from $7.3 million, including accrued interest of ~~real estate~~$1.2 million, to a carrying amount of $5.9 million. Additionally, in the first quarter of 2020, the Company also recorded a total of $2.1 million in reserves pertaining to this 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

under ASU 2016-03, reducing its carrying amount to $3.8 million as of March 31, 2020.

2421

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements –- (continued)

~~September 30, 2019~~

~~(unaudited)~~

March 31, 2020

At ~~September 30, 2019,~~March 31, 2020, 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
September 30, 2019 December 31, 2018
(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.



Borrower	Date of loan	Maturity date	Total loan commitments		Outstanding balance as of:					Interest rate
Borrower	Date of loan	Maturity date	Total loan commitments		March 31, 2020		December 31, 2019			Interest rate
(In thousands)
Preferred Capital Marketing Services, LLC ^(1,7)	N/A	N/A	$	—	$	—	$	650		N/A
Preferred Apartment Advisors, LLC ^(1,2,8)	N/A	N/A	—		—		15,178			N/A
Haven Campus Communities, LLC ^(1,3)	6/11/2014	12/31/2018	11,660		9,011		9,011			8	%
Oxford Capital Partners, LLC ^(4,5)	10/5/2015	6/30/2020	8,000		5,577		5,438			10	%
Mulberry Development Group, LLC ⁽⁵⁾	3/31/2016	6/30/2020	750		525		525			12	%
360 Capital Company, LLC ^(5,6)	5/24/2016	12/31/2020	3,400		1,218		3,394			12	%
360 Capital Company, LLC ⁽⁹⁾	N/A	N/A	—		—		7,754			N/A
Unamortized loan fees					—		(33		)

			$	23,810	$	16,331	$	41,917

⁽¹⁾See related party disclosure in Note 6.
⁽²⁾ The amounts payable under this revolving credit line were collateralized by an assignment of the Former Manager's rights to fees due under the Sixth Amended and Restated Management Agreement between the Company and the Former Manager, or the Management Agreement.
⁽³⁾ The amount payable under the 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.
⁽⁴⁾ 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.
⁽⁵⁾ 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.
⁽⁶⁾ 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.
⁽⁷⁾ The line of credit extended to Preferred Capital Marketing Services, with a total commitment of $1.5 million, was eliminated as part of the Internalization transaction discussed in note 6.
⁽⁸⁾ The line of credit extended to PAA, with a total commitment of $24 million, was eliminated as part of the Internalization transaction discussed in note 6.
⁽⁹⁾ The line of credit extended to 360 Capital Company, with a total commitment of $8 million, was paid off during the first quarter.

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 from the default date through ~~September 30, 2019~~March 31, 2020 was approximately ~~$880,000.~~$1.3 million. 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~~$3.75 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.

2522

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements –- (continued)

~~September 30, 2019~~

~~(unaudited)~~

March 31, 2020

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,				Three month periods ended March 31,
(In thousands)	2019		2018		2019		2018		2020		2019
Real estate loans:
Current interest payments	$	8,083	$	6,974	$	23,031	$	24,164
Current interest									$	7,357	$	7,469
Additional accrued interest	3,471		4,391		10,040		14,587		3,295		3,385
Origination fee amortization	283		250		1,063		1,288
Loan origination fee amortization									277		315
Purchase option termination fee amortization	1,283		4,791		6,900		7,261		4,040		4,233
Default interest									62		—

Total real estate loan revenue	13,120		16,406		41,034		47,300		15,031		15,402
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		—
Notes and lines of credit									912		1,490
Bank and money market accounts									33		—
Agency mortgage-backed securities									—		198

Interest income on loans and notes receivable	$	15,154	$	17,289	$	45,969	$	49,886	$	15,976	$	17,090

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~~March 31, 2020 of approximately ~~$383.2~~$310.3 million. The maximum aggregate amount of loans to be funded as of ~~September 30, 2019~~March 31, 2020 was approximately ~~$457.9~~$373.2 million, which includes approximately ~~$74.7~~$62.9 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. The Company evaluates the expected residual profit it expects to collect under the terms of the loan versus the expected residual profit expected to be collected by the developer (in conjunction with any equity investors, if applicable), along with the "loan versus investment" characteristics as set forth by ASC 310-25. For each loan, the characteristics and the facts and circumstances indicate that loan accounting treatment is ~~appropriate.~~appropriate in cases where (i) the majority of the expected residual profit is expected to be due the developer and (ii) the majority of "loan versus investment" tests indicate that the instrument is a loan.

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, ofinaddition to outstanding accrued interest, for these loans as of ~~September 30, 2019~~March 31, 2020 totaled approximately ~~$104.7~~$49.8 million (with a total commitment amount of approximately ~~$134.2~~$65.5 million). The Company is also subject to a geographic concentration of risk that could be considered significant with regard to the Sanibel Straits, Sanibel Straits Capital, E-Town, Vintage Destin, Hidden River, Hidden River Capital and Vintage Horizon West real estate loan investments, all of which are partially supporting various real estate projects in ~~the~~Florida. The drawn amount, inaddition to outstanding accrued interest, for these loans as of March 31, 2020 totaled approximately $57.2 million (with a total commitment amount of approximately $61.2 million). 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.~~amount and all outstanding accrued interest.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements - (continued)

March 31, 2020

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~~million. On December 10, 2019, the Company ~~will collect the face value of~~sold its ~~tranche of $27.6~~investment in Series 2018-ML04 for $6.2 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~~paid 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,~~17, 2019, the Company sold its ~~entire position of a pool with associated premium amounts totaling $41.1~~investment in Series 2019-ML05 for $20.4 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,~~On February 14, 2020, 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"); expired. See note 6 for discussion regarding a termination fee agreement with and payment to Preferred Capital Securities, LLC, or PCS, an affiliate of the Company, in conjunction with the Company's winding down of the $1.5 Billion Unit Offering.

At March 31, 2020, the Company's active equity offerings consisted of:

an offering of up to ~~a maximum of 500,000 shares~~1,000,000 Shares of Series MA1 Redeemable Preferred Stock ~~(“mShares”~~("Series A1 Preferred Stock"), ~~par value $0.01 per share (the “mShares Offering”~~Series M1 Redeemable Preferred Stock ("Series M1 Preferred Stock"), or a combination of both (collectively the "Series A1/M1 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")~~; 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~~shares of Preferred Stock 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~~Cumulative gross proceeds and offering costs for our active equity offerings consisted of:


(In thousands)							Deferred Offering Costs														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		Total offering		Gross proceeds as of March 31, 2020		Reclassified as reductions of stockholders' equity		Recorded as deferred assets		Total		Specifically identifiable offering costs ⁽¹⁾		Total offering costs
$1.5 Billion Unit Offering(2)	$	1,500,000			$	1,057,127	$	7,327	$	1,336	$	8,663	$	99,510	$	108,173	1,500,000		1,236,414		15,099		—		15,099		115,645		130,744
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
Series A1/M1 Offering																	1,000,000		38,805		74		1,839		1,913		3,854		5,767
2019 Shelf Offering	400,000		⁽³	⁾	—		—		819		819		—		819		400,000		—		—		858		858		—		858
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	$	2,900,000	$	1,275,219	$	15,173	$	2,697	$	17,870	$	119,499	$	137,369

⁽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 upexpired on February 14, 2020.

Preferred Apartment Communities, Inc.

Notes 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 theConsolidated 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.~~Statements - (continued)

March 31, 2020

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 Series M1 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~~could have reimbursed its Former Manager up to 2.0% of the gross proceeds of such offerings for all organization and offering expenses that ~~are~~were incurred by the ~~Manager.~~Former Manager through the date of the Internalization. However, upon approval by the conflicts committee of the board of directors, the Company ~~may reimburse~~could have reimbursed its Former 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~~January 31, 2020, the Company internalized the functions performed by the Former Manager and New Market Advisors, LLC ("Sub-Manager") by acquiring the entities that owned the Former Manager and the Sub-Manager for an aggregate purchase price of $154 million, plus up to $25 million of additional consideration to be paid within 36 months, due upon the earlier of (i) if, for the immediately preceding fiscal year beginning on January 1, funds from operations ("FFO") of the Company per weighted average basic share of the Company’s common stock and Class A Unit (as defined in the limited partnership agreement of PAC OP) outstanding for such fiscal year is determined to be greater than or equal to $1.55 or (ii) on the thirty-six (36) month anniversary of the closing of the Internalization. Pursuant to the Stock Purchase Agreement, the sellers sold all of the outstanding shares of capital stock of NELL Partners, Inc. ("NELL") and NMA Holdings, Inc. ("NMA") to PAC Carveout, LLC ("PAC Sub") in exchange for an aggregate of approximately $111.1 million in cash paid at the closing which reflects the satisfaction of certain indebtedness of NELL, the estimated net working capital adjustment, and a hold back of $15 million for certain specified matters (the "Specified Matters Holdback Amount"). The Specified Matters Holdback Amount is payable to the NELL sellers less certain losses following final resolution of any such specified matters.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements - (continued)

March 31, 2020

Daniel M. DuPree and Leonard A. ~~Williams,~~Silverstein were executive directors of NELL Partners, Inc., which controlled the ~~Company's~~Former Manager through the date of the Internalization. Daniel M. DuPree was the Chief Executive Officer and Leonard A. Silverstein was the President and Chief Operating Officer of the Former Manager. Trusts established, or entities owned, by the family of John A. Williams, Daniel M. DuPree, the family of Leonard A. Silverstein, the Company’s former Vice Chairman of the Board, ~~passed away.~~ and formerPresident and Chief Operating Officer, were the owners of NELL. Trusts established, or entities owned, by Joel T. Murphy, the Company’s Chief Executive Officer and a member of the Board, the family of Mr. Williams, Mr. DuPree and the family of Mr. Silverstein were the owners of NMA.

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., the son of the late John A. ~~Williams' son.~~Williams, the Company's former Chief Executive Officer and Chairman of the Board. 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~~financed 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 and the acquisition of the underlying property on March 31, 2020 as described in note 3, therefore qualify as related party transactions.

~~Preferred Apartment Communities, Inc.~~

~~Notes to Consolidated Financial Statements – (continued)~~

~~September 30, 2019~~

~~(unaudited)~~

The Management Agreement ~~entitles~~entitled the Former Manager to receive compensation for various services it ~~performs~~performed 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,					Three-month periods ended March 31,
Type of Compensation	Basis of Compensation	2019		2018		2019		2018		Basis of Compensation	2020		2019

Acquisition fees	1.0% of the gross purchase price of real estate assets	$	2,864	$	2,606	$	5,467	$	7,226	1.0% of the gross purchase price of real estate assets	$	235	$	1,400
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		1.0% of the maximum commitment of any real estate loan, note or line of credit receivable	—		401
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		0.6% of any assumed, new or supplemental debt incurred in connection with an acquired property	47		344
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		Monthly fee equal to one-twelfth of 0.50% of the total book value of assets, as adjusted	1,349		3,725
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		Monthly fee up to 4% of the monthly gross revenues of the properties managed	890		2,457
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		Monthly fee equal to 2% of the monthly gross revenues of the Company	616		1,486
Construction management fees	Quarterly fee for property renovation and takeover projects	73		93		208		366		Quarterly fee for property renovation and takeover projects	14		57
Disposition fees	1% of the sale price of a real estate asset	—		425		16		860		1% of the sale price of a real estate asset	—		—
Contingent asset management fees / general and administrative fees										Recognized upon disposition of the property when exceeding the 7% IRR hurdle	—		—

		$	12,280	$	12,054	$	32,109	$	34,621		$	3,151	$	9,870

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements - (continued)

March 31, 2020

The Former Manager ~~may, in its discretion, waive~~waived 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~~$25.6 million of combined asset management and general and administrative fees related to acquired properties ~~as of September 30, 2019 have~~had been waived by the ~~Manager. A total~~Former Manager; at the date of ~~$19.7~~Internalization, all of the remaining contingent fees of $24.1 million ~~remaining waived fees could possibly be earned by~~were eliminated in conjunction with the ~~Manager in the future.~~Company's Internalization transaction.

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



(In thousands)
	Three-month periods ended March 31,
	2020		2019
	$	1,430	$	4,079

The Former Manager ~~utilizes~~utilized 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 Former Manager was reimbursed ~~$384,243~~$40,451 and ~~$357,807~~$128,801 for the ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2020 and 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~~$0 and ~~$1,080,660~~$337,344 for the ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018 ,~~ respectively. These costs are recorded as deferred offering costs until such time as additional closings occur on the ~~2019~~Series A1/M1 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. In conjunction with the winding down of the $1.5 Billion Unit Offering, the Company has engaged PCS to perform certain termination-related services. These services began in October 2019 and will continue through April 2020. For the three-month period ended March 31, 2020, the Company paid an additional $2.3 million for these services, which were recorded as deferred offering costs.

~~The~~Prior to the Internalization, the Company ~~pays its Manager leasing commission fees for office and retail leases based on varying rates and conditions.~~

~~The Company holds~~held 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~~Partners and a revolving line of credit with a maximum borrowing amount of ~~$22.0~~$24.0 million to its Manager. Both of these instruments were extinguished in connection with the Internalization transaction.

Of the Company’s ~~$27.9~~$20.2 million accrued interest receivable on real estate loans balance on the Consolidated Balance Sheet, ~~approximately $1.2~~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~~$1.2 million 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~~Stock and its Series A1 Preferred Stock. For the Company's mShares Preferred Stock, 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,~~Similarly, for 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~~Company's Series M1 Preferred Stock, ~~according to~~dividends are paid on an escalating scale of $5.08 per month in the first year ~~one,~~following share issuance, increasing each year to $5.92 per month in year ten and beyond. All preferred stock dividends are prorated for partial months at issuance as necessary.

Given the nature of the escalating dividends associated with the Company’s mShares Preferred Stock and Series M1 Preferred Stock, the Company accrues dividends at the effective dividend rate in accordance with GAAP. This results in the Company recording larger dividends declared to preferred stockholders in the Company’s Consolidated Statements of Operations than dividends required to be paid for the first four years after issuance with respect to the mShares and the first five years after issuance with respect to the Series M1 Preferred Stock. Similarly, this will result in the Company recording smaller dividends declared to preferred stockholders in the Company’s Consolidated Statements of Operations than dividends required to be paid for the fifth through the eighth year after issuance with respect to the mShares and the sixth through the tenth year after issuance with respect to the Series M1 Preferred Stock. Following the escalation period (year eight for the mShares Preferred Stock and year ten for the Series M1 Preferred Stock), the dividends declared to preferred stockholders in the Company’s Consolidated Statements of Operations will equal the dividend paid.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements - (continued)

March 31, 2020

The Company declared aggregate quarterly cash dividends on its Common Stock of ~~$0.785~~$0.2625 and ~~$0.76~~$0.26 per share for the ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2020 and 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,~~March 31, 2020, the Company had ~~856,409~~774,687 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				Dividends and distributions declared
	For the nine-month periods ended September 30,				For the three-month periods ended March 31,
	2019		2018		2020		2019
(In thousands)
Series A Preferred Stock	$	79,351	$	61,558	$	31,100	$	24,733
mShares	3,176		1,243		1,746		806
Series A1 Preferred Stock					212		—
Series M1 Preferred Stock					10		—
Common Stock	34,599		30,283		12,491		11,195
Class A OP Units	683		813		203		229

Total	$	117,809	$	93,897	$	45,762	$	36,963

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,			Three-month periods ended March 31,				Unamortized expense as of March 31,
(In thousands)	(In thousands)	2019		2018		2019		2018		2019		(In thousands)	2020		2019		2020

Class B Unit awards:	Class B Unit awards:											Class B Unit awards:
2016	2016	$	—	$	55	$	2	203		$	—	2016	$	—	$	2	$	—
2017	2017	78		68		234		263		81		2017	3		78		—
2018	2018	72		538		215		2,002		358		2018	71		72		216
Restricted stock grants:	Restricted stock grants:											Restricted stock grants:
2017		—		—		—		120		—			—		—		—
2018		—		91		120		151		—			—		90		—
2019		106		—		176		—		245			105		—		35
Restricted stock units:	Restricted stock units:											Restricted stock units:
2017		15		19		53		62		17			—		18		—
2018		15		25		55		80		110			14		19		63
2019		19		—		67		—		200			19		32		145
2020													18		—		202

Total		$	305	$	796	$	922	$	2,881	$	1,011		$	230	$	311	$	661

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements - (continued)

March 31, 2020

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,~~March 31, 2020, cumulative activity of grants of Class B Units of the Operating Partnership, or Class B OP units, was:


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

Units granted		256,087		286,392			256,087		286,392
Units forfeited:
John A. Williams ⁽¹⁾		(38,284	)	—			(38,284	)	—
Voluntary forfeiture by senior executives(2)		(128,258	)	—			(128,258	)	—
Other		(22,722	)	(5,334	)		(22,722	)	(5,334	)

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

Units earned and converted into Class A Units		—		(254,730	)		—		(281,058	)

Class B Units outstanding at September 30, 2019		66,823		26,328
Class B Units outstanding at March 31, 2020							66,823		—

Units unearned but vested		32,575		—			49,688		—
Units unearned and not yet vested		34,248		26,328			17,135		—

Class B Units outstanding at September 30, 2019		66,823		26,328
Class B Units outstanding at March 31, 2020							66,823		—

⁽¹⁾Pro rata modification of award on April 16, 2018, the date of Mr. Williams' passing.	⁽¹⁾Pro rata modification of award on April 16, 2018, the date of Mr. Williams' passing.					⁽¹⁾Pro rata modification of award on April 16, 2018, the date of Mr. Williams' passing.
⁽²⁾Additional Class B OP units granted to senior executives other than Mr. Williams were voluntarily forfeited at the end of 2018.						⁽²⁾Additional Class B OP units granted to senior executives other than Mr. Williams were voluntarily forfeited at the end of 2018.

There were no grants of Class B OP Units for ~~2019.~~2019 or 2020.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements - (continued)

March 31, 2020

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~~made grants of restricted stock units, or RSUs, to its employees under the 2019 Plan, and prior to Internalization, made grants of RSUs to certain employees of affiliates of the Company under the 2011 Plan, as shown in the following table:


Grant date	1/2/2019			1/2/2018			1/3/2017			1/2/2020			1/2/2019			1/2/2018
Service period	2019-2021			2018-2020			2017-2019			2020-2022			2019-2021			2018-2020

RSU activity:
Granted	27,760			20,720			26,900			21,400			27,760			20,720
Forfeited	(2,960		)	(4,760		)	(6,971		)	(600		)	(4,360		)	(5,720		)
Units earned and converted into common stock	—			—			(14,154		)	—			—			—

RSUs outstanding at September 30, 2019	24,800			15,960			5,775
RSUs outstanding at March 31, 2020										20,800			23,400			15,000

RSUs unearned but vested	—			5,345			—			—			7,823			10,028
RSUs unearned but not yet vested	24,800			10,615			5,775
RSUs unearned and not yet vested										20,800			15,577			4,972

RSUs outstanding at September 30, 2019	24,800			15,960			5,775
RSUs outstanding at March 31, 2020										20,800			23,400			15,000

Fair value per RSU	$	10.77		$	16.66		$	11.92		$	10.58		$	10.77		$	16.66
Total fair value of RSU grant	$	298,975		$	345,195		$	320,648		$	226,412		$	298,975		$	345,195

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

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements - (continued)

March 31, 2020

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~~are settled in shares of 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~~During the ~~real estate properties acquired during the nine-month~~three-month period ended ~~September 30, 2019 with~~March 31, 2020, the Company obtained mortgage ~~debt~~financing on the following properties as shown in the following ~~table (see note 16):~~table:

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



Property	Date	Initial principal amount (in thousands)		Fixed/Variable rate	Interest rate		Maturity date

251 Armour Yards	1/22/2020	$	3,522	Fixed	4.50	%	1/22/2025
Wakefield Crossing	1/29/2020	7,891		Fixed	3.66	%	2/1/2032
Morrocroft Centre	3/19/2020	70,000		Fixed	3.40	%	4/10/2033

		$	81,413

⁽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~~three-month periods ended ~~September 30,~~March 31, 2020 and 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



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

1/3/2020	Ursa	$	31.4	L + 300		$	—	$	—	n/a		$	—
2/28/2019	Lenox Village Town Center	$	29.2	3.82	%	$	17,000	$	39.3	4.34	%	$	1,153,000

3631

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements –- (continued)

~~September 30, 2019~~

~~(unaudited)~~

March 31, 2020

The following table summarizes our mortgage notes payable at ~~September 30, 2019:~~March 31, 2020:


(In thousands)
Fixed rate mortgage debt:	Principal balances due			Weighted-average interest rate		Weighted average remaining life (years)	Principal balances due			Weighted-average interest rate		Weighted average remaining life (years)
Multifamily communities	$	1,108,840		3.91	%	9.2
Residential Properties							$	1,288,213		3.92	%	8.4
New Market Properties	551,371			3.97	%	8.0	578,380			4.00	%	8.1
Preferred Office Properties	566,344			4.22	%	13.7	637,617			4.13	%	13.2
Student housing properties	159,780			4.13	%	5.8

Total fixed rate mortgage debt	2,386,335			4.01	%	9.8	2,504,210			3.99	%	9.5

Variable rate mortgage debt:
Multifamily communities	39,078			3.62	%	4.8
Residential Properties							97,630			4.47	%	2.5
New Market Properties	47,150			4.68	%	4.1	47,150			3.82	%	3.6
Preferred Office Properties	—			—		—	—			—	%	—
Student housing properties	131,916			5.55	%	1.0

Total variable rate mortgage debt	218,144			5.01	%	2.3	144,780			4.26	%	2.8

Total mortgage debt:
Multifamily communities	1,147,918			3.90	%	9.1
Residential Properties							1,385,843			3.96	%	8.0
New Market Properties	598,521			4.02	%	7.7	625,530			3.99	%	7.7
Preferred Office Properties	566,344			4.22	%	13.7	637,617			4.13	%	13.2
Student housing properties	291,696			4.77	%	3.6

Total principal amount	2,604,479			4.09	%	9.2	2,648,990			4.01	%	9.2
Deferred loan costs	(37,954		)				(38,182		)
Mark to market loan adjustment	(4,688		)				(4,557		)
Mortgage notes payable, net	$	2,561,837					$	2,606,251

The Company has placed an interest rate ~~cap~~caps on the variable rate ~~mortgage~~mortgages on its Avenues at Creekside multifamily ~~community.~~community and its Tradition and Bloc student housing properties. Under guidance provided by ASC 815-10, ~~this~~these interest rate ~~cap is a derivative,~~caps are derivatives that isare embedded in ~~its~~the debt ~~host.~~hosts. Because the interest rate ~~cap is~~caps are deemed to be clearly and closely related to ~~its~~the debt ~~host,~~hosts, 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,~~March 31, 2020, the weighted-average remaining life of deferred loan costs related to the Company's mortgage indebtedness was approximately ~~9.6~~9.5 years. Our mortgage notes have maturity dates between ~~October~~April 1, ~~2019~~2021 and June 1, 2054.

Credit Facility

The Company has a credit facility, or Credit Facility, with KeyBank National Association, or KeyBank, which ~~defines~~includes 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

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements - (continued)

March 31, 2020

interest rate for the Revolving Line of Credit was ~~5.53%~~4.57% for the ~~nine-month period~~year ended ~~September 30, 2019.~~March 31, 2020. 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,~~December 20, 2019, the Company entered into a ~~$11.0~~$70.0 million interim term loan with KeyBank, or the ~~Interim~~2019 Term Loan, to partially finance the acquisition of ~~Anderson Central, a grocery-anchored shopping center~~Morrocroft Centre, an office building located in ~~Anderson, South~~Charlotte, North Carolina. The ~~Interim~~2019 Term Loan ~~accrued~~accrues interest at a rate of LIBOR plus ~~2.5%~~1.7% per ~~annum until it~~annum.The Term Loan balance was repaid ~~and extinguished during~~in conjunction with the ~~first quarter~~closing of ~~2018.~~permanent mortgage financing for Morrocroft Centre on March 19, 2020.

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,~~March 31, 2020, 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~~$2.0 billion	₍₂₎	$~~1.9~~2.0 billion	₍₄₎
Debt yield	Minimum 8.25%		~~9.99%~~10.1%
Payout ratio	Maximum 95%	₍₃₎	~~93.9%~~90.6%
Total leverage ratio	Maximum 65%		~~56.8%~~60.5%
Debt service coverage ratio	Minimum 1.50x		~~1.75x~~2.10x

⁽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~~$1.3 billion as of ~~September 30, 2019.~~March 31, 2020.

⁽³⁾Calculated on a trailing four-quarter basis. For the ~~twelve-month period~~year ended ~~September 30, 2019,~~March 31, 2020, the maximum dividends and distributions allowed under this covenant was approximately ~~$154.7~~$173.7 million.

⁽⁴⁾Adjusted to exclude the effect of costs incurred with internalization.

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,~~March 31, 2020, unamortized loan fees and closing costs for the Credit Facility were approximately ~~$1.3~~$1.0 million, which will be amortized over a remaining loan life of approximately ~~2.3~~1.8 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.~~acquisitions. 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,~~March 31, 2020, 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~~1.9 years.

3833

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements –- (continued)

~~September 30, 2019~~

~~(unaudited)~~

March 31, 2020

Interest Expense

Interest expense, including amortization of deferred loan costs was:


	Three-month periods ended September 30,				Nine-month periods ended September 30,				Three-month periods ended March 31,
(In thousands)	2019		2018		2019		2018		2020		2019

Multifamily communities	$	12,162	$	11,409	$	35,434	$	33,597
Residential Properties									$	14,866	$	14,800
New Market Properties	6,422		5,071		18,123		14,056		6,750		5,586
Preferred Office Properties	5,909		3,489		16,617		8,696		6,858		5,351
Student housing properties	3,946		3,497		11,295		7,572
Interest paid to real estate loan participants	—		802		110		1,746		—		110

Total	28,439		24,268		81,579		65,667		28,474		25,847

Credit Facility and Acquisition Facility	360		1,389		1,587		3,305		1,119		909
Interest Expense	$	28,799	$	25,657	$	83,166	$	68,972	$	29,593	$	26,756

Future Principal Payments

The Company’s estimated future principal payments due on its debt instruments as of ~~September 30, 2019~~March 31, 2020 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.~~



Period	Future principal payments (in thousands)
2020	$	225,796
2021	182,951
2022	223,020
2023	164,716
2024	358,898
Thereafter	1,685,109

Total	$	2,840,490

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~~March 31, 2020 and December 31, ~~2018.~~2019.

11. Commitments and Contingencies

On ~~March 28, 2014,~~January 31, 2020, the Company ~~entered into a payment guaranty in support of~~assumed its Former Manager's eleven-year office lease, which began on October 9, 2014. As of ~~September 30, 2019,~~March 31, 2020, the amount ~~guarantied by~~of rent due from the Company was ~~$5.5~~$16.7 million ~~and is reduced by $619,304 per lease year~~ over the remaining term of the lease.

A total of approximately $24.1 million of asset management and general and administrative fees related to acquired properties as of March 31, 2020 that have been waived by the Former Manager were eliminated in conjunction with the Company's Internalization transaction.

At March 31, 2020, the Company had unfunded commitments on its real estate loan portfolio of approximately $62.9 million.

At March 31, 2020, the Company had unfunded contractual commitments for tenant, leasing, and capital improvements of approximately $14.1 million.

3934

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements - (continued)

March 31, 2020

~~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~~Company as Lessor

For the three months ended March 31, 2020 and ~~office properties are leased to tenants under operating leases for~~2019, the Company recognized rental property revenues of $111.9 million and $94.4 million, respectively, of which ~~the terms vary. The future minimum~~$10.3 million and $9.3 million, respectively, represented variable 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,revenue.

Company 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
Lessee

The ~~Company’s~~Company has three ground leases related to our office and grocery-anchored shopping ~~centers~~center assets that generally have extended terms (e.g. over twenty 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 is also, as of January 31, 2020 following the Internalization, the lessee of office space for its property support center which expires in May 2026, and of furniture and office equipment, which leases generally are ~~geographically concentrated within the Sunbelt and Mid-Atlantic region of the United States.~~ three to five years in duration with minimal rent increases.

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. OurCompany recorded lease expense as follows:



	For the three-month periods ended March 31, 2020				Weighted average remaining lease term (years)	Weighted average discount rate
	Lease expense		Cash paid		Weighted average remaining lease term (years)	Weighted average discount rate
(dollars in thousands)
Office space	$	475	$	475	5.7	3.0	%
Ground leases	13		4		29.6	4.4	%
Office equipment	101		101		2.3	3.0	%

Total	$	589	$	580

~~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~~Future minimum rent expense for office space, ground 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.office equipment were:

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.



For the year ending December 31:	Future Minimum Rents as of March 31, 2020
(in thousands)	Office space		Ground leases		Office equipment		Total

2020 ⁽¹⁾	$	2,008	$	38	$	271	$	2,317
2021	2,359		51		247		2,657
2022	2,998		51		136		3,185
2023	3,067		51		48		3,166
2024	3,139		51		38		3,228
Thereafter	3,163		1,136		10		4,309
Total	$	16,734	$	1,378	$	750	$	18,862

⁽¹⁾Remaining nine months

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~~four distinct segments: ~~multifamily communities, student housing~~residential properties, real estate related financing, New Market Properties and Preferred Office Properties.

~~Multifamily~~

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements - ~~consists of the Company's portfolio of owned residential multifamily communities~~(continued)

March 31, 2020

~~Student Housing~~Residential Properties - consists of the Company's portfolio of ~~owned~~residential multifamily communities and student housing properties. Multifamily Communities and Student Housing Properties were previously presented as separate reporting segments. The Company has collapsed these two segments into one Residential Properties segment.

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~~Dawson Marketplace real estate ~~loans.~~loan, that was repaid and extinguished on February 3, 2020.

Preferred Office Properties - consists of the Company's portfolio of office ~~buildings.~~buildings, which are owned by Preferred Office Properties, LLC, a wholly-owned subsidiary of the Company.

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		March 31, 2020		December 31, 2019

Assets:
Multifamily communities	$	1,586,795	$	1,503,648
Student housing properties	494,847		411,102
Residential properties					$	2,121,989	$	2,047,905
Financing	518,947		448,617		338,055		409,226
New Market Properties	1,053,920		883,594		1,124,091		1,125,230
Preferred Office Properties	1,012,889		884,648		1,155,431		1,123,212
Other ⁽¹⁾	600,249		279,349
Other					87,833		64,987
Consolidated assets	$	5,267,647	$	4,410,958	$	4,827,399	$	4,770,560

⁽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~~three months ended March 31, 2020 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,				Three-month periods ended March 31,
(In thousands)	2019		2018		2019		2018		2020		2019

Capitalized expenditures:
Multifamily communities	$	3,412	$	3,452	$	8,257	$	14,150
Student housing properties	1,297		1,061		3,120		2,269
Residential properties									$	3,759	$	2,125
New Market Properties	2,699		3,163		5,703		4,950		1,276		1,577
Total	$	7,408	$	7,676	$	17,080	$	21,369	$	5,035	$	3,702

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

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements - (continued)

March 31, 2020

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.

Total revenues by reportable segment of the Company were:



	Three-month periods ended March 31,
(In thousands)	2020		2019
Revenues

Rental and other property revenues:
Residential properties	$	57,565	$	51,825
New Market Properties	28,002		22,059
Preferred Office Properties ⁽¹⁾	26,462		20,943
Total rental and other property revenues	112,029		94,827


Financing revenues	15,813		16,656
Miscellaneous revenues	3,260		23
Consolidated revenues	$	131,102	$	111,506

(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 March 31, 2020, the Company has deferred revenue in an aggregate amount of $47.0 million in connection with such improvements. The remaining balance to be recognized is approximately $38.8 million which is included in the deferred revenues line on the consolidated balance sheets at March 31, 2020. 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 $0.9 million and $0.9 million for the three-month periods ended March 31, 2020 and 2019, respectively.

The Company expects that negative impacts from the COVID-19 pandemic affecting its in-line retail tenants within its New Market Properties segment may continue throughout 2020. Three tenants to date have ceased business operations and one has exercised an termination option.

The chief operating decision maker utilizes segment net operating income, or Segment NOI, in evaluating the performance of its operating segments. Segment NOI represents total property revenues less total property operating expenses, excluding depreciation and amortization, for all properties held during the period. Segment NOI for the Company's financing segment consists of interest revenues from the Company's real estate loan investments and notes and lines of credit receivable, as well as revenues from terminated property purchase options. Management believes that Segment NOI is a helpful tool in evaluating the operating performance of the segments because it measures the core operations of property performance by excluding corporate level expenses and other items not directly related to property operating performance.

4237

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements –- (continued)

~~September 30, 2019~~

~~(unaudited)~~

March 31, 2020

~~Total revenues by~~Segment NOI for each reportable segment offor the ~~Company were:~~thee-month periods ended March 31, 2020 and 2019 were as follows:

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.



	Three-month periods ended March 31,
(In thousands)	2020			2019
Segment net operating income (Segment NOI)

Residential Properties	$	35,751		$	29,333
Financing	15,813			16,679
New Market Properties	19,846			15,805
Preferred Office Properties	19,668			14,804
Miscellaneous revenues	509			—

Consolidated segment net operating income	91,587			76,621

Interest expense:
Residential Properties	14,866			14,800
New Market Properties	6,750			5,586
Preferred Office Properties	6,858			5,351
Financing	1,119			1,019
Depreciation and amortization:
Residential Properties	24,414			25,865
New Market Properties	13,414			10,335
Preferred Office Properties	11,681			9,089
Management Internalization	178,793			45
Management fees, net of forfeitures	1,963			5,200
Provision for expected credit losses	5,133			—
Equity compensation to directors and executives	230			311
Gain on land condemnation	(479		)	—
Gain on non-cash net assets of consolidated VIEs	—			(141		)
Loss on extinguishment of debt	—			17
Gain on trading investment, net	—			(4		)
Corporate G&A and Other	6,368			1,428

Net income (loss)	$	(179,523	)	$	(2,280	)

~~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

4438

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements –- (continued)

~~September 30, 2019~~

~~(unaudited)~~

March 31, 2020

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,							Three-month periods ended March 31,
	(In thousands, except per-share figures)	2019			2018			2019			2018			(In thousands, except per-share figures)	2020			2019
Numerator:	Numerator:													Numerator:
	Operating income before gains on sales of real estate and trading investment	$	26,086		$	15,275		$	75,089		$	47,165		Operating (loss) income before gain on sale of trading investment	$	(150,409	)	$	24,348
	Gains on sales of real estate and trading investment	—			18,605			4			38,961			Gain on sale of trading investment	—			4

	Operating income	26,086			33,880			75,093			86,126			Operating (loss) income	(150,409		)	24,352
	Interest expense	28,799			25,657			83,166			68,972			Interest expense	29,593			26,756
	Change in fair value of net assets of consolidated VIEs from mortgage-backed pools	591			131			1,316			185			Change in fair value of net assets of consolidated VIEs from mortgage-backed pools	—			141
	Loss on extinguishment of debt	(15		)	—			(84		)	—			Less: loss on extinguishment of debt	—			(17		)
	Gain on sale of real estate loan investment	—			—			747			—			Gains on sale of real estate loan investment and land condemnation	479			—

	Net (loss) income	(2,137		)	8,354			(6,094		)	17,339			Net (loss) income	(179,523		)	(2,280		)
	Consolidated net loss (income) attributable to non-controlling interests	59			(216		)	138			(456		)	Consolidated net loss (income) attributable to non-controlling interests	3,141			(492		)

	Net (loss) income attributable to the Company	(2,078		)	8,138			(5,956		)	16,883			Net (loss) income attributable to the Company	(176,382		)	(2,772		)

	Dividends declared to preferred stockholders	(29,446		)	(22,360		)	(82,527		)	(62,801		)	Dividends declared to preferred stockholders	(33,068		)	(25,539		)
	Earnings attributable to unvested restricted stock	(5		)	(5		)	(14		)	(13		)	Earnings attributable to unvested restricted stock	(2		)	(2		)

	Net loss attributable to common stockholders	$	(31,529	)	$	(14,227	)	$	(88,497	)	$	(45,931	)	Net loss attributable to common stockholders	$	(209,452	)	$	(28,313	)

Denominator:	Denominator:													Denominator:
	Weighted average number of shares of Common Stock - basic	44,703			40,300			43,703			39,598			Weighted average number of shares of Common Stock - basic	47,129			42,680

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

	Weighted average number of shares of Common Stock - basic and diluted	44,703			40,300			43,703			39,598			Weighted average number of shares of Common Stock - basic and diluted	47,129			42,680

	Net loss per share of Common Stock attributable to													Net loss per share of Common Stock attributable to
	common stockholders, basic and diluted	$	(0.71	)	$	(0.35	)	$	(2.02	)	$	(1.16	)	common stockholders, basic and diluted	$	(4.44	)	$	(0.66	)

^(A) The Company's outstanding Class A Units of the Operating Partnership ~~(856~~(775 and ~~1,068~~879 Units at ~~September 30,~~March 31, 2020, and 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~~2,075 and ~~1,508~~1,720 outstanding shares of Series A Preferred Stock at ~~September 30,~~March 31, 2020 and 2019, respectively and ~~2018, respectively.~~37 outstanding shares of Series A1 Preferred Stock at March 31, 2020. 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 9098 and 3756 mShares outstanding at ~~September 30,~~March 31, 2020 and 2019, respectively. The Company's shares of Series M1 preferred stock accrue dividends at an escalating rate of 6.1% in year one to 7.1% in year ten and ~~2018, respectively.~~thereafter. The Company had 2 shares of Series M1 preferred stock outstanding at March 31, 2020.

^(C) The Company's outstanding unvested restricted share awards ~~(20~~(7 and 196 shares of Common Stock at ~~September 30,~~March 31, 2020 and 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~~30,867 shares of Common Stock; (ii) 9367 Class B Units; (iii) 207 shares of unvested restricted common stock; and (iv) ~~46,535~~59 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 and credit losses reserves, where applicable.


	As of September 30, 2019										As of March 31, 2020
	Carrying value				Fair value measurements using fair value hierarchy						Carrying value				Fair value measurements using fair value hierarchy
(In thousands)	Carrying value		Fair Value		Level 1		Level 2		Level 3		Carrying value		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Real estate loans	$	381,486	$	415,909	$	—	$	—	$	415,909	$	315,693	$	329,924	$	—	$	—	$	329,924
Notes receivable and line of credit receivable	41,657		41,657		—		—		41,657		16,332		16,332		—		—		16,332
	$	423,143	$	457,566	$	—	$	—	$	457,566	$	332,025	$	346,256	$	—	$	—	$	346,256
Financial Liabilities:
Mortgage notes payable	$	2,604,479	$	2,656,937	$	—	$	—	$	2,656,937	$	2,648,990	2,610,751		$	—	$	—	$	2,610,751
Revolving line of credit	50,000		50,000		—		—		50,000
Revolving credit facility											191,500		191,500		—		—		191,500
	$	2,654,479	$	2,706,937	$	—	$	—	$	2,706,937	$	2,840,490	$	2,802,251	$	—	$	—	$	2,802,251


	As of December 31, 2018										As of December 31, 2019
	Carrying value				Fair value measurements using fair value hierarchy						Carrying value				Fair value measurements using fair value hierarchy
(In thousands)	Carrying value		Fair Value		Level 1		Level 2		Level 3		Carrying value		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Real estate loans ⁽¹⁾	$	334,211	$	366,328	$	—	$	—	$	366,328	$	375,460	$	382,373	$	—	$	—	$	382,373
Notes receivable and line of credit receivable	47,307		47,307		—		—		47,307		41,917		41,917		—		—		41,917
	$	381,518	$	413,635	$	—	$	—	$	413,635	$	417,377	$	424,290	$	—	$	—	$	424,290
Financial Liabilities:
Mortgage notes payable	$	2,339,752	2,313,405		$	—	$	—	$	2,313,405	$	2,609,829	$	2,659,242	$	—	$	—	$	2,659,242
Revolving credit facility	57,000		57,000		—		—		57,000
Loan participation obligations	5,181		5,181		—		—		5,181
Revolving line of credit											—		—		—		—		—
Term note payable											70,000		70,000		—		—		70,000
	$	2,401,933	$	2,375,586	$	—	$	—	$	2,375,586	$	2,679,829	$	2,729,242	$	—	$	—	$	2,729,242

⁽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,~~March 31, 2020, discounted to the reporting date utilizing a discount rate believed to be appropriate for multifamily development projects.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements - (continued)

March 31, 2020

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 Programas 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) 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) 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~~April 1, ~~2019~~2020 and ~~October 31, 2019,~~April 30, 2020, the Company issued ~~42,025 Units under its $1.5 Billion Unit Offering~~11,461 shares of Series A1 Redeemable Preferred Stock and collected net proceeds of $10.3 million after commissions and fees; issued 751 shares of Series M1 Redeemable Preferred Stock and collected net proceeds of approximately ~~$37.8~~$0.7 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,~~April 23, 2020, the Company closed on a ~~real estate~~$52.0 million first mortgage on the Altis at Wiregrass multifamily community. The 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%~~2.90% per annum and matures on ~~November~~May 1, ~~2031.~~2030.

On ~~October~~April 30, ~~2019,~~2020, we closed on the acquisition of a 288-unit multifamily community in Panama City, Florida. We partially financed the acquisition with a 10 year, $45.0 million first mortgage that bears interest at a fixed rate of 2.95% per annum.

On May 11, 2020, our board of directors declared a quarterly dividend on our Common Stock of $0.175 per share, payable

on July 15, 2020 to stockholders of record on June 15, 2020.

The Company has received numerous requests for rent relief including deferment of the payment of rent or rent reductions beginning with April 2020 rent. Discussions with individual tenants that failed to satisfy their April rent obligations are underway. Though the outcome of these discussions is expected to vary from tenant to tenant, the Company ~~amended the purchase~~has and ~~sale agreement for the sale of six of its student housing properties~~expects to ~~include the sale of its Haven 12 real estate loan investment that has an outstanding principal~~continue to offer deferred rent arrangements with some tenants, including multifamily residents and ~~accrued interest amount of approximately $7.3 million.~~in-line retail tenants whose operations have been significantly impacted by COVID-19.

4940


~~Item 1B.~~	~~Unresolved Staff Comments~~

~~None.~~

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

Significant Developments

~~During~~On January 1, 2020, Joel T. Murphy became Chief Executive Officer of the ~~nine-month period ended September 30, 2019,~~Company. Mr. Murphy will continue as a member of the board, where he has served since May 2019. Mr. Murphy was the CEO of our New Market Properties subsidiary for the last five years until his appointment as our CEO, and since June 2018 has been the chairman of the Company's investment committee. Mr. Murphy succeeded our previous CEO and Chairman of the Board, Daniel M. DuPree, who will remain with us as Executive Chairman of the Board.

On January 31, 2020, we ~~acquired two office buildings, two multifamily communities, five grocery-anchored shopping centers~~internalized the functions performed by Preferred Apartment Advisors, LLC (the "Former Manager") and ~~one student housing property.~~NMP Advisors, LLC (the "Sub-Manager") by acquiring the entities that own the Manager and the Sub-Manager (such transactions, collectively, the "Internalization") for an aggregate purchase price of $154.0 million, plus up to $25.0 million of additional consideration to be paid within 36 months. Additionally, up to $15.0 million of the $154.0 million purchase price was to be held back and is payable to the sellers less certain losses following final resolution of certain specified matters. Pursuant to the Stock Purchase Agreement entered into on January 31, 2020 the sellers sold all of the outstanding shares of NELL Partners, Inc. (“NELL”) and NMA Holdings, Inc., parent companies of the Manager and Sub-Manager, respectively, to us, in exchange for an aggregate of approximately $111.1 million in cash paid at the closing which reflects the satisfaction of certain indebtedness of NELL, the estimated net working capital adjustment, and a hold back of $15.0 million for certain specified matters. Trusts established, or entities owned, by the family of John A. Williams, the Company’s former Chairman of the Board and Chief Executive Officer, Daniel M. DuPree, the Company’s Executive Chairman of the Board and former Chief Executive Officer of the Company, and the family of Leonard A. Silverstein, the Company’s Vice Chairman of the Board, and former President and Chief Operating Officer, were the owners of NELL. Trusts established, or entities owned, by Joel T. Murphy, the Company’s Chief Executive Officer and a member of the Board, the family of Mr. Williams, Mr. DuPree and the family of Mr. Silverstein were the owners of NMA.

During the ~~nine-month~~thee-month period ended ~~September 30, 2019,~~March 31, 2020, we acquired one multifamily community and two grocery-anchored shopping centers. We also closed on a real estate loan investment of up to $13.4 million, in partial support of the development of a 256-unit multifamily community in Charlotte, North Carolina.

During the three-month period ended March 31, 2020, we issued ~~372,540~~65,298 Units (one share of Series A Preferred Stock and one warrant to purchase 20 shares of our Common Stock) and collected net proceeds of approximately ~~$335.2~~$58.8 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~~During the three-month period ended March 31, 2020, we issued 32,136 shares of Series A1 Preferred Stock and collected net proceeds of approximately $28.9 million. During the same period, we issued 1,933 shares of Series M1 Preferred Stock and collected net proceeds of approximately $1.9 million.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~~During the ~~nine-month period ended September 30, 2019, we issued 780,880 shares~~first quarter 2020, the COVID-19 pandemic began to cause widespread business closings and job losses amid stay-at-home orders from many states. We began to see some initial effects at the end of ~~Common Stock upon~~ the ~~exercise~~first quarter and accelerating into April, as monthly rent collections from certain of ~~Warrants issued~~our in-line retail tenants fell and several small businesses closed their doors. The expected impact on our second quarter 2020 rental and other property revenues, as well as future leasing and renewals is unknown, due to uncertainty surrounding the duration and severity of the COVID-19 pandemic. We have begun offering rent deferrals for one to two months to tenants in our ~~offerings~~multifamily communities, by which the deferred rent will be collected over the remainder of ~~our Series A Redeemable Preferred Stock and~~the leases for those electing to participate. Any deferred rent not collected ~~net proceeds of approximately $10.1 million from those exercises.~~will be written off.

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~~Quarterly Report on Form ~~10-K,~~10-Q, 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;

• the possibility that the anticipated benefits from the internalization of our Former Manager and Sub-Manager, or

the Internalization, may not be realized or may take longer to realize than expected, or that unexpected costs or unexpected

liabilities may arise from the Internalization;

the impact of the coronavirus (COVID-19) pandemic on PAC’s business operations and the economic conditions in the markets in which PAC operates;

• PAC’s ability to mitigate the impacts arising from COVID-19;

• 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~~2019 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~~Quarterly Report on Form ~~10-K.~~10-Q.

Industry Outlook

MultifamilyCommunities

~~We believe continued, albeit potentially sporadic, improvement in the United States' economy will continue for 2019, given the continued job growth~~

Multifamily owners 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 asoperators, like every other business, have been impacted by COVID-19, but 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 softeninglong term health 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, itindustry 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 demandintact. Demand for multifamily rental housing will continue due to the ongoing entry of the “millennial” generation into the ~~sons~~workforce, and ~~daughters~~the desire of the ~~babyboom~~Baby Boom generation ~~into~~to “downsize” as they focus on their retirement years.

Entering this pandemic-induced recession, most economists agreed there was a housing shortfall, not an oversupply. Regarding multifamily specifically, in 2019, the ~~workforce. This generation~~industry was reaching occupancy levels not seen since 2000 and net absorption of units was also at peak levels during this last economic cycle. While this pandemic and resulting recession will create significant job losses in the near term, economic models forecast a quick recovery and the multifamily industry is in a prime position to recover relatively quickly given the aforementioned baseline pre-COVID-19. Until such recovery, the Company’s multifamily assets are well positioned to sustain through a recession with a majority of the assets being newly constructed, suburban and located in dynamic sunbelt growth markets. The Company also has strict leasing guidelines regarding the credit worthiness of its tenants, providing for a ~~higher statistical propensity to rent their home~~relatively resilient rental stream. Additionally, the Company focused on financing the assets with project level, long-term, fixed rate debt, which provides surety and ~~stay a renter deeper into their life-cycle, resulting~~continuity in ~~an increase in demand for rental housing. This combination~~times of ~~factors should generally result in gradual increases in market rents, lower concessions and opportunities for increases in ancillary fee income.~~uncertainty.

Student Housing Properties

~~Regarding~~Student housing owners and operators, like their multifamily counterparts, have been impacted by the COVID-19 pandemic. Traffic and leasing statistics were immediately decreased by the decision of most universities across the country to discontinue on-campus classes and move to an on-line learning program. With these immediate closings, including the mandates to vacate on-campus housing dorms, and students being advised by university personnel to return to their permanent homes to resume their classes on-line, the student’s college experience changed overnight. In addition, without a commitment from the universities as to when the Fall 2020 classes would begin, the student-renter base took a “wait and see” approach toward signing leases for the Fall 2020 school year.

Furthermore, the dynamics of enrollment growth information has also been impacted by the pandemic in that universities have pushed back their enrollment deadlines. PAC’s student housing portfolio was tracking 9% ahead of the number of leases executed for Fall 2019 until the university closings occurred. The portfolio is currently 1% ahead of 2019 leases executed at this point in the leasing schedule.

During the first week of May, universities have begun to announce their opening dates for their Fall 2020 on-campus class schedules and as such, we are anticipating that leasing velocity will quickly resume. While the safety of students is of the utmost importance, and social distancing and other processes will require implementation by the universities to resume in-person classes, nearly all of the 4,000 institutions of higher learning require tuition to maintain their operations. That said, the formal announcements that in-person classes will resume for Fall 2020 is extremely important to colleges and universities, as well.

Pre-COVID-19, there was some discussion in the industry as to whether on-line learning could become a threat to the in-person college experience. As we are hearing from many of our students who have been forced to finish the academic year through total on-line learning, this experience does not come close to delivering the college experience that is obtained from the personal growth through meeting and debating issues and topics with others who have different thought processes or come from different backgrounds and cultures, the mentoring from instructors, collaboration with other students, the sense of belonging, and the pride in university through sports and other programs. While the COVID-19 pandemic may have some lasting impact on the university systems and the student housing industry, much of this impact is positive due to the ~~Fall 2019 preleasing numbers were very consistent~~improvements in processes, programs and technologies that have been implemented that will carry forward after the pandemic, providing us with ~~last year, which is encouraging considering~~new tools that will make 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,living learning experience safer, stronger and ~~historically high enrollment rates of 68% to 70% over the next four years among high school graduates.~~more efficient.

New Market Properties

We specialize in owning and managing a portfolio of 54 neighborhood shopping centers anchored by market leading grocers in Sunbelt and Mid-Atlantic suburban markets with strong demographic fundamentals. These centers are primarily anchored by Publix, Kroger, Harris Teeter and other leading grocers that have high sales per square foot.

Despite the COVID-9 pandemic, our outlook on grocery-anchored shopping centers remains positive as we believe the primary characteristics of our centers are defensive in nature with daily-necessity and convenience-based tenants. We have collected 77% of April’s contractual rental obligations during a time in which federal, state and local authorities have mandated closures of nonessential businesses. Our grocery stores and pharmacies have been permitted to remain open as well as other essential services such as financial services, home improvement, auto, medical, pet stores and restaurants that were limited to take-out and delivery services only. Personal service providers including salons and fitness centers deemed nonessential have been closed, but are a smaller percentage of our tenant mix.

While there is uncertainty as to when other parts of the country restrictions will be relaxed or lifted, 87% of our tenant base is located in states (GA, TX, FL, TN, SC and AL) which have all begun to reopen. As the COVID-19 restrictions begin to ease, our personal service tenants of hair salons, nail salons, fitness centers, medical providers and restaurants will begin their recovery as customers will return to shopping at our daily needs oriented shopping centers. We believe long term that the tenant makeup of our centers is significantly less impacted by e-commerce, and the grocery anchors will continue to generate repeat trips to the center.

We will continue to invest in the grocers who invest in their brands, developing their e-commerce strategies, and that continue to optimize their in-store shopping experience for customers. Publix and Kroger anchor 41 of our 54 shopping centers and both have hit record sales levels during the pandemic. Both of these grocers are positioned to gain market share in the future as a result of their proactive approach to technology through proprietary services like Click List (Kroger), operational expertise, and strong financial positions.

Preferred Office Properties

~~The~~We continue to hold a positive outlook for the office industry in our markets, notwithstanding COVID-19, while acknowledging that in the immediate near term this positive performance may be more relative than absolute. Multi-year contractual leases and rent schedules paired with corporate balance sheets offer protection against the impacts of the pandemic. While unprecedented acceleration in new unemployment claims and revenue disruptions from a temporary consumer demand shock are having adverse impacts across the entire domestic and international economy, office-using employment has fared better thus far than have hourly wage earners. In addition, certain industries have been more affected - namely travel and leisure, and the energy sector. Markets with concentrations to these industries are likely to be more strained than others. We also believe New York City will be slower to recover due to the severity of its encounter with the virus. Fortunately, the Company’s office investments are not located in New York City or any markets where tourism or energy is the primary economic driver. Leasing activity and investment ~~market continues~~sales are likely to ~~post healthy fundamentals across our current~~be at a reduced pace until there is more visibility as to the timing and ~~target footprint,~~speed of the U.S. recovery. Again, fortunately, the Company’s office investments are 97% leased with limited lease expirations upcoming. In the meantime we expect corporate customers to turn to their balance sheets where ~~we are primarily focused~~necessary to weather the impacts on ~~high growth, non-“Gateway” markets. Due~~revenues. Longer duration leases for office

space and well-capitalized corporate customers will be highlighted through this period, offering stability to ~~banking reforms and conservative behavior among market participants, this cycle has been characterized by an historically low level of speculative~~high-quality, “core” profile office ~~construction which is supporting continued good performance.~~owners.

Critical Accounting Policies

There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form ~~10-K~~10-

K for the year ended December 31, ~~2018.~~2019, besides the following.

Expected Credit Loss Reserves

On January 1, 2020, we adopted ASU 2016-13, that replaced the incurred loss model with an expected loss model for instruments measured at amortized cost, and requires entities to record credit allowances for total expected future losses on financial assets at the outset of each loan. For each loan for which we are the lender, the amount of protection afforded to us is estimated to be the excess of the future estimated fair market value of the developed property over the commitment amount of each loan (including other loans senior to ours), inclusive of accrued interest and other related receivables. The excess represents the amount of equity dollars in each real estate project plus profit expected to be realized on the project, which are in a subordinate position to our real estate loan investments. This numeric result is expressed as a percentage of the property's expected future fair value, which is then held up against a banded range of loss percentages that was derived from our company-specific loss experience. The product of this indicated loss reserve ratio and the total loan commitment amount is the initial total expected credit loss reserve. This loss reserve may be further refined by us due to any subjective factors deemed pertinent and worthy of reflection in the initial reserve. Over the life of the loan, the initial reserve is reevaluated for potential reduction at the achievement of certain milestones in construction and lease-up progress as the project approaches completion and the loan approaches maturity, given no unforeseen degradation in project performance or failure to adhere to the terms of the loan by the borrower/developer.

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 period ended March 31, 2020 were:

Amidst the COVID-19 pandemic, we collected 96.3% or better of rental revenues across all our verticals for the month of April 2020 except for our in-line retail tenants and ~~nine-month periods ended September 30, 2019 were:~~we are tracking at generally the same pace for May.

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 %



	2020 Cash Collections of Certain Rental Revenues ⁽¹⁾
	January		February		March		April

Multifamily	99.4	%	99.4	%	99.1	%	97.7	%
Student housing	99.8	%	99.9	%	99.5	%	97.3	%
Office	99.7	%	99.5	%	98.7	%	96.3	%
Grocery-anchored retail:
Grocery anchors	100.0	%	100.0	%	100.0	%	100.0	%
In-line tenants	98.7	%	98.9	%	95.8	%	66.7	%

Occupancy:
Multifamily	95.1	%	95.5	%	95.7	%	94.3	%
Student housing	96.1	%	96.3	%	96.2	%	96.2	%
Percent leased:
Office	96.3	%	96.3	%	96.7	%	95.9	%
Grocery-anchored retail	92.9	%	92.6	%	92.6	%	92.5	%

⁽¹⁾Percent of revenue billed includes base rent, operating expense escalations, pet, garage, parking and storage rent. Figures are before any effect of rent deferrals.

⁽¹⁾~~Per weighted average~~Our net loss per share ~~of Common Stock outstanding~~was $(4.44) and $(0.66) for the three-month periods ~~indicated.~~

⁽²⁾ended March 31, 2020 and 2019, respectively. Funds From Operations, or FFO, ~~and AFFO results are presented~~for the three months ended March 31, 2020 was $(3.42) per weighted average share and unit outstanding and includes costs associated with the acquisition of ~~Common Stock and Class A Unit in~~Preferred Apartment Advisors, LLC (our "Former Manager") of approximately $178.8 million. Excluding these costs, our ~~Operating Partnership outstanding~~FFO per share was $0.31 for the ~~periods indicated.~~

⁽³⁾~~Per share of Common Stock and Class A Unit outstanding.~~three months ended March 31, 2020. Core FFO was $0.38 for the three months ended March 31, 2020, as compared to $0.41 for the three months ended March 31, 2019.

•

For the ~~third~~first quarter ~~2019,~~2020, our declared dividends to preferred and Common Stockholders and distributions to Unitholders exceeded our NAREIT-defined FFO result for the period, which was negative. Our Core FFO payout ratio to Common Stockholders and Unitholders was approximately ~~85.0%~~69.4% and our Core FFO payout ratio (before the deduction of preferred dividends) to our preferred stockholders was approximately ~~67.5%.~~ 64.4%^(A)(B)

•

Our AFFO payout ratio to Common Stockholders and Unitholders was approximately ~~223.5%~~55.9% for the ~~third~~first quarter ~~2019 and 93.2% for the trailing twelve-month period ended September 30, 2019.~~2020. Our AFFO payout ratio (before the deduction of preferred dividends) to our preferred stockholders was approximately ~~84.5%~~59.3% for the ~~third~~first quarter ~~2019 and 68.2% for the trailing twelve-month period ended September 30, 2019.~~2020. ^(B)We have ~~$27.9~~approximately $20.2 million of ~~earned~~accrued but not yet ~~payable~~received interest revenue on our real estate loan investment portfolio.

~~At September 30,~~On January 1, 2020, Joel T. Murphy became Chief Executive Officer of the Company. Mr. Murphy will continue as a member of the board, where he has served since May 2019 and as Chairman of the ~~market value~~Company's Investment Committee, a role he has had since June 2018. Mr. Murphy was the CEO of our ~~common stock~~New Market Properties subsidiary for the last five years until his appointment as our CEO. Mr. Murphy succeeded Daniel M. DuPree as CEO. Mr. DuPree will remain with us as Executive Chairman of the Board.

On January 31, 2020, we internalized the functions performed by Preferred Apartment Advisors, LLC (the "Former Manager") and NMP Advisors, LLC (the "Sub-Manager") by acquiring the entities that own the Manager and the Sub-Manager (such transactions, collectively, the "Internalization") for an aggregate purchase price of $154.0 million, plus up to $25.0 million of additional consideration to be paid within 36 months. Additionally, up to $15.0 million of the $154.0 million purchase price was ~~$14.45 per share. A hypothetical investment~~to be held back and is payable to the sellers less certain losses following final resolution of certain specified matters. Pursuant to the Stock Purchase Agreement entered into on January 31, 2020 the sellers sold all of the outstanding shares of NELL Partners, Inc. (“NELL”) and NMA Holdings, Inc., parent companies of the Manager and Sub-Manager, respectively, to us, 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~~exchange for an ~~average annual return~~aggregate of approximately ~~17.4% through September 30, 2019.~~$111.1 million in cash paid at the closing which reflects the satisfaction of certain indebtedness of NELL, the estimated net working capital adjustment, and a hold back of $15.0 million for certain specified matters.

During the first quarter 2020, the borrowers of the Dawson Marketplace, Falls at Forsyth, and (in conjunction with our acquisition of the underlying property) Altis Wiregrass real estate loans repaid all amounts due under the loans, including aggregate principal amounts of approximately $53.9 million and interest accrued in periods prior to the first quarter 2020 of approximately $8.9 million, the latter of which was additive to our first quarter 2020 AFFO result. The three mezzanine loan investments that matured this quarter yielded a weighted average 17% internal rate of return.

As of ~~September 30, 2019,~~March 31, 2020, the average age of our multifamily communities was approximately ~~5.4~~5.8 years, which is the youngest in the public multifamily REIT industry.

As of ~~September 30, 2019,~~March 31, 2020, approximately ~~91.6%~~94.5% of our permanent property-level mortgage debt has fixed interest rates and approximately ~~3.8%~~3.7% has variable interest rates which are capped. We believe we are well protected against potential increases in market interest rates.

As of March 31, 2020, our total assets were approximately $4.8 billion. Our total assets at March 31, 2019, also approximately $4.8 billion, included approximately $545 million of VIE mortgage pool assets attributable to other mortgage pool participants that were consolidated due to our investments in the Freddie Mac K Program. During the ~~third~~fourth quarter 2019, we ~~refinanced six retail~~sold our K Program investments, realizing an internal rate of return of approximately 18%. Excluding the consolidated VIE mortgage pool assets ~~with new fixed-rate mortgage debt and on October 1, we repaid two other maturing mortgages on retail properties which remain unencumbered.~~from the March 31, 2019 total, our total assets grew approximately $570.4 million, or 13.4%.

At ~~September 30, 2019,~~March 31, 2020, our leverage, as measured by the ratio of our debt to the undepreciated book value of our total assets, was approximately ~~52.4%~~53.7%. 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,~~March 20, 2020, we ~~closed on~~delivered a ~~real estate loan investment of up~~written termination notice 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~~prospective purchaser of six of our student housing properties for their failure to ~~include~~consummate the ~~sale~~purchase. Accordingly, we received an additional $2.75 million of ~~our Haven 12 real estate loan investment that has an outstanding principal and accrued interest amount of approximately $7.3 million.~~forfeited earnest money as liquidated damages.

^(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 Core FFO and AFFO payout ~~ratio~~ratios to Common Stockholders as the ratio of Common Stock dividends and distributions to Core FFO and AFFO. We calculate the Core FFO and AFFO payout ~~ratio~~ratios to preferred stockholders as the ratio of Preferred Stock dividends to the sum of Preferred Stock dividends and Core FFO 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 and rights of first offer, 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~~up to 15 basis points (if any), depending on the loan.

As of ~~September 30, 2019,~~March 31, 2020, potential property acquisitions and units from projects in our ~~actual and potential purchase option~~real estate loan investment 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⁾
Kennesaw Crossing	Atlanta, GA	250	⁽⁵⁾	⁽⁵⁾
Vintage Horizon West	Orlando, FL	340	⁽⁴⁾	⁽⁴⁾
Solis Chestnut Farm	Charlotte, NC	256	⁽⁵⁾	⁽⁵⁾

Student housing ~~properties:~~property:
Solis Kennesaw II	Atlanta, GA	175	⁽⁵⁾⁽⁶⁾	⁽⁵⁾

Office property:
8West	Atlanta, GA	⁽⁶⁾	⁽⁶⁾⁽⁷⁾	⁽⁶⁾⁽⁷⁾

		~~2,228~~2,718

⁽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~~Falls at Forsyth projects were terminated, in exchange for an aggregate ~~$20.2~~$17.2 million in termination fees from the ~~developers, net of amounts due to third party loan participants.~~developers.
⁽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⁾We hold a right of first offer on the property, at a to-be-agreed-upon market price.
⁽⁶⁾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⁾⁽⁷⁾The project plans are for the construction of a class A office building consisting of approximately ~~192,000~~195,000 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~~

Three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~2018~~2019

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~~March 31, 2020 versus ~~2018:~~2019:

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 )%



Preferred Apartment Communities, Inc.	Three-month periods ended March 31,						Change inc (dec)
	2020			2019			Amount			Percentage
Revenues:
Rental and other property revenues	$	111,866		$	94,393		$	17,473		18.5	%
Interest income on loans and notes receivable	13,439			11,288			2,151			19.1	%
Interest income from related parties	2,537			5,802			(3,265		)	(56.3	)%
Miscellaneous revenues	3,260			23			3,237			—
Total revenues	131,102			111,506			19,596			17.6	%

Operating expenses:
Property operating and maintenance	16,800			12,879			3,921			30.4	%
Property salary and benefits	5,191			4,657			534			11.5	%
Property management fees	2,003			3,267			(1,264		)	(38.7	)%
Real estate taxes and insurance	15,525			14,090			1,435			10.2	%
General and administrative	6,364			1,420			4,944			348.2	%
Equity compensation to directors and executives	230			311			(81		)	(26.0	)%
Depreciation and amortization	49,509			45,289			4,220			9.3	%
Asset management and general and administrative expense fees to related party	3,099			7,829			(4,730		)	(60.4	)%
Provision for expected credit losses	5,133			—			5,133			—
Management internalization expense	178,793			45			178,748			—
Total operating expenses	282,647			89,787			192,860			214.8	%

Waived asset management and general and administrative expense fees	(1,136		)	(2,629		)	1,493			(56.8	)%

Net operating expenses	281,511			87,158			194,353			223.0	%

Operating (loss) income before gain on sale of trading investment	(150,409		)	24,348			(174,757		)	(717.7	)%
Gain on sale of trading investment	—			4			(4		)	(100.0	)%
Operating (loss) income	(150,409		)	24,352			(174,761		)	(717.6	)%
Interest expense	29,593			26,756			2,837			10.6	%
Change in fair value of net assets of consolidated VIEs from mortgage-backed pools	—			141			(141		)	—
Loss on extinguishment of debt	—			(17		)	17			—
Gain on land condemnation	479			—			479			—

Net loss	(179,523		)	(2,280		)	(177,243		)	—
Consolidated net loss (income) attributable to non-controlling interests	3,141			(492		)	3,633			(738.4	)%

Net loss attributable to the Company	$	(176,382	)	$	(2,772	)	$	(173,610	)	—

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~~ periodsended ~~September 30,~~March 31, 2020 versus 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)					Three-month periods ended March 31,						Change inc (dec)
	2019			2018			Amount			Percentage		2020			2019			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	)%
Rental revenues & other property revenues												$	27,838		$	21,624		$	6,214		28.7	%
Interest income on notes receivable												164			435			(271		)	(62.3	)%
Total revenues	25,270			20,006			5,264			26.3	%	28,002			22,059			5,943			26.9	%

Operating expenses:
Property operating and maintenance	2,619			2,234			385			17.2	%	3,324			2,309			1,015			44.0	%
Property management fees	824			653			171			26.2	%	787			767			20			2.6	%
Real estate taxes	3,158			2,090			1,068			51.1	%
Real estate taxes and insurance												4,048			3,188			860			27.0	%
General and administrative	229			379			(150		)	(39.6	)%	765			99			666			672.7	%
Equity compensation to directors and executives	17			150			(133		)	(88.7	)%	13			18			(5		)	(27.8	)%
Depreciation and amortization	11,677			10,462			1,215			11.6	%	13,414			10,335			3,079			29.8	%
Asset management and general and administrative
expense fees to related parties	1,892			1,522			370			24.3	%	720			1,657			(937		)	(56.5	)%
Insurance, professional fees and other expenses	496			298			198			66.4	%
Total operating expenses	20,912			17,788			3,124			17.6	%	23,071			18,373			4,698			25.6	%
Waived asset management and general and administrative
expense fees	(94		)	(128		)	34			(26.6	)%	(17		)	(99		)	82			(82.8	)%
Net operating expenses	20,818			17,660			3,158			17.9	%	23,054			18,274			4,780			26.2	%

Operating income	4,452			2,346			2,106			89.8	%	4,948			3,785			1,163			30.7	%
Interest expense	6,422			5,071			1,351			26.6	%	6,750			5,586			1,164			20.8	%
Loss on extinguishment of debt	16			—			16			—	%
Gain on land condemnation												479			—			479			100.0	%
Net income (loss)	(1,986		)	(2,725		)	739			(27.1	)%	$	(1,323	)	$	(1,801	)	$	478		(26.5	)%
Consolidated net (income) loss attributable to non-controlling
interests	(12		)	—			(12		)	—	%

Consolidated net loss (income) attributable to non-controlling interests												$	31		$	—		31			100.0	%

Net income (loss) attributable to the Company	$	(1,974	)	$	(2,725	)	$	751		(27.6	)%	$	(1,292	)	$	(1,801	)	509			(28.3	)%

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~~2019 were generally the primary drivers behind our increases in rental and property revenues and property operating expenses for the ~~three-month and nine-month periods~~year ended ~~September 30, 2019~~March 31, 2020 versus ~~2018.~~2019.

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
n/a

2/28/2018 Green Park Atlanta, GA 310
n/a
n/a

9/27/2018 The Lodge at Hidden River Tampa, FL 300
n/a
n/a

11/9/2018 Vestavia Reserve Birmingham, AL 272
n/a
n/a

11/15/2018
CityPark View South ⁽¹⁾
Charlotte, NC 200
n/a
n/a

8/8/2019 Artisan at Viera Melbourne, FL 259
n/a
n/a

9/18/2019 Five Oaks at Westchase Tampa, FL 218
n/a
n/a

New Market Properties:
4/27/2018 Greensboro Village Nashville, TN n/a
n/a
70,203

4/27/2018 Governors Towne Square Atlanta, GA n/a
n/a
68,658

6/26/2018 Neapolitan Way Naples, FL n/a
n/a
137,580

6/29/2018 Conway Plaza Orlando, FL n/a
n/a
117,705

7/6/2018 Brawley Commons Charlotte, NC n/a
n/a
122,028

12/21/2018 Hollymead Town Center Charlottesville, VA n/a
n/a
158,807

1/17/2019 Gayton Crossing Richmond, VA n/a
n/a
158,316

5/28/2019 Free State Shopping Center Washington, D.C. n/a
n/a
264,152

6/12/2019 Disston Plaza Tampa - St. Petersburg, FL n/a
n/a
129,150

6/12/2019 Polo Grounds Mall West Palm Beach, FL n/a
n/a
130,285

8/16/2019 Fairfield Shopping Center Virginia Beach, VA n/a
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
n/a
187,000

7/31/2018 150 Fayetteville Raleigh, NC n/a
n/a
560,000

12/20/2018 Capitol Towers Charlotte, NC n/a
n/a
479,000

7/25/2019 CAPTRUST Tower Raleigh, NC n/a
n/a
300,000

7/31/2019 251 Armour Atlanta, GA n/a
n/a
35,000

2,934
3,145
3,149,713




Acquisition date	Property	Location	Units	Beds	Leasable square feet

	Multifamily communities:
8/8/2019	Artisan at Viera	Melbourne, FL	259	-	-
9/18/2019	Five Oaks at Westchase	Tampa, FL	218	-	-
3/31/2020	Altis Wiregrass Ranch	Tampa, FL	392	-	-

	New Market Properties:
1/17/2019	Gayton Crossing	Richmond, VA	-	-	158,316
5/28/2019	Free State Shopping Center	Washington, D.C.	-	-	264,152
6/12/2019	Disston Plaza	Tampa - St. Petersburg, FL	-	-	129,150
6/12/2019	Polo Grounds Mall	West Palm Beach, FL	-	-	130,285
8/16/2019	Fairfield Shopping Center ⁽¹⁾	Virginia Beach, VA	-	-	231,829
11/14/2019	Berry Town Center	Orlando, FL	-	-	99,441
12/19/2019	Hanover Shopping Center ⁽¹⁾	Wilmington, NC	-	-	305,346
1/29/2020	Wakefield Crossing	Raleigh, NC	-	-	75,927
3/19/2020	Midway Market	Dallas, TX	-	-	85,599

	Student housing properties:
3/27/2019	Haven49	Charlotte, NC	322	887	-

	Preferred Office Properties:
7/25/2019	CAPTRUST Tower ⁽¹⁾	Raleigh, NC	-	-	300,000
7/31/2019	251 Armour	Atlanta, GA	-	-	35,000
12/20/2019	Morrocroft Centre ⁽¹⁾	Charlotte, NC	-	-	291,000

			1,191	887	2,106,045

⁽¹⁾ ~~CityPark View South~~Property is owned through 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.~~consolidated joint venture.

~~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~~and other property revenues

Rental ~~revenue~~and other property revenues increased primarily due ~~primarily~~ to properties acquired since January 1, ~~2018,~~2019, with grocery-anchored shopping centers and office buildings accounting for 36.4% and 30.1%, respectively, and newly-acquired multifamily and student residential properties accounting for an additional 13.0% and 10.9%, respectively. Similar increases in property operations and maintenance and property salary and benefits expense were driven by these acquisitions.

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 ~~shown~~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.

We recorded property salary and benefits expense for individuals who handle 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 %
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.

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

Interest income from our real estate loan investments decreased for the ~~three-month and nine-month periods~~year ended ~~September 30, 2019~~March 31, 2020 versus ~~2018.~~2019. The principal amount outstanding on our portfolio of real estate loan investments decreased to approximately ~~$383.2~~$310.3 million at ~~September 30, 2019~~March 31, 2020 from ~~$392.2~~$338.3 million at ~~September 30, 2018. The total commitment amount~~March 31, 2019. Interest revenue decreased due to the repayment or settlement of ~~our real estate loan investment portfolio~~fully-drawn, larger balance loans prior to the first quarter 2020. Interest revenue from mortgage-backed securities and money market investments fell from approximately $198,000 for the first quarter 2019 to almost zero for the first quarter 2020. Revenues from the amortization of terminated purchase options decreased from approximately ~~$515.5~~$4.2 million ~~at September 30, 2018~~for the first quarter 2019 to ~~$457.9~~approximately $4.0 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.

for the first quarter 2020. We recorded interest income and other revenue from these instruments as presented in Note 4 to ~~the Company's~~our Consolidated Financial Statements.

~~Property operating and maintenance expense~~

~~Expenses to operate and maintain our properties increased due~~Miscellaneous revenues for the year ended March 31, 2020 consisted 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 increasesforfeited earnest money deposit 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~~a prospective purchaser of six of our student housing 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~~paid fees for property management services to our Former 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~~All property management fees paid to ~~properties acquired since~~our Former Manager ceased effective with our Internalization on January ~~1, 2018,~~31, 2020, which resulted in a decrease of approximately $1.6 million in these property management fees for the first quarter 2020 as ~~shown in~~compared to 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 %

first quarter 2019.

Real estate taxes and insurance

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 %

2019. 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~~increase in general and administrative expenses ~~occurred as shown in~~were due to charges for corporate salaries and administrative expenses that are borne by us following 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 %
management internalization.

Equity compensation to directors and executives

~~Expenses recorded for equity~~Equity compensation ~~awards decreased~~expenses incurred fell for the ~~three-month and nine-month periods ended September 30,~~first quarter 2020 as compared to the corresponding 2019 ~~versus 2018~~period primarily due to the ~~lack~~expense of ~~a Class B OP Unit grant for 2019. The~~the third and final vesting tranche of the 2017 Class B Unit grant ~~made on January 2, 2018 was comprised of an aggregate 256,087~~having almost completely been realized prior to the first quarter 2020. We had no Class B ~~Units with a fair value of approximately $4.3 million.~~Unit grants in 2019 or 2020.

Depreciation and amortization

The increases in depreciation and amortization for the three-month ~~and nine-month periods~~period ended ~~September 30,~~March 31, 2020 versus 2019 ~~versus 2018 are primarily~~increased due to ~~acquisitions made during~~the addition of properties acquired since January 1, 2019.

Asset management fees and general and administrative fees to related party

Monthly asset management fees ~~are~~were equal to one-twelfth of 0.50% of the total book value of assets, as adjusted. General and administrative expense fees ~~are~~were equal to 2% of the monthly gross revenues of the Company. Both ~~are~~were calculated as prescribed by the Former Management Agreement and ~~are~~were paid monthly to our Former 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. Effective with the closing of our Internalization transaction on January 31, 2020, fees to the Former Manager will no longer be incurred.

~~Insurance, professional fees and other expenses~~Provision for expected credit losses

Effective January 1, 2020, we adopted ASU 2016-03, which requires us to estimate the amount of future credit losses we expect to incur over the lives of our real estate loan investments at the inception of each loan, rather than perform assessments for impairment as circumstances dictate. 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 %
Company’s opening reserve of approximately $7.4 million was recorded as a cumulative adjustment to accumulated earnings on January 1, 2020. Additionally, during the first quarter 2020, we recorded current estimated credit losses on our Berryessa, V & Three, and Kennesaw Crossing real estate loan investments that totaled approximately $4.5 million.

~~Waived asset management and general and administrative~~Management Internalization expense ~~fees~~

~~The Manager may, in its discretion, waive some or all of~~On January 31, 2020, we internalized the ~~asset management, property management, or general and administrative fees for properties owned~~functions performed by the ~~Company. The waived fees are converted at~~Former Manager and the ~~time of such election into contingent fees, which are earned~~Sub-Manager by acquiring the entities that own the Manager ~~only in~~and the ~~event~~Sub-Manager for an aggregate purchase price of ~~a sales transaction, and whereby the Company’s capital contributions for the property being sold exceed a 7% annual rate~~$154 million, plus up to $25 million of ~~return. The Company will recognize in future periods~~additional consideration 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.~~be paid within 36 months.

~~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~~increase consisted ~~of:~~of interest expense on mortgages that increased from $24.2 million for the first quarter 2019 to $26.2 million for the first quarter 2020, due to the additional acquired properties in 2019 and 2020. Interest expense on our revolving line of credit increased from approximately $587,000 for the first quarter 2019 to approximately $859,000 for the first quarter 2020.

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, Core FFO, AFFO and ~~AFFO,~~NOI, 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, Core FFO, AFFO and ~~AFFO~~NOI 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, Core FFO, AFFO and ~~AFFO~~NOI 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, Core 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.

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

The Company makes adjustments to FFO to remove costs incurred and revenues recorded that are singular in nature and outside the normal operations of the Company and portray its primary operational results. The Company calculates Core FFO as:

FFO, plus:

• acquisition and pursuit (dead deal) costs;

• Loan cost amortization on acquisition term notes and loan coordination fees;

• losses on debt extinguishments or refinancing costs;

• internalization costs;

• non-cash dividends on preferred stock;

• non-cash (income) expense for current expected credit losses;

• Extraordinary Event - COVID-19 Expense; and

Less:

• earnest money forfeitures by prospective asset purchasers.

Core FFO figures reported by us may not be comparable to Core FFO figures reported by other companies. We utilize Core FFO as a supplemental measure of the operating performance of our portfolio of real estate assets. We believe Core FFO 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 Core FFO removes costs incurred and revenues recorded that are often singular in nature and outside the normal operations of the Company, we believe it improves comparability to investors in assessing our core operating results across periods. Core 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 Core 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:

Core 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, Core 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)	to Net (Loss) Income Attributable to Common Stockholders ^(A)							to Net (Loss) Income Attributable to Common Stockholders ^(A)
		Three months ended September 30,							Three months ended March 31,
(In thousands, except per-share figures)	(In thousands, except per-share figures)	2019			2018			(In thousands, except per-share figures)	2020			2019

Net loss attributable to common stockholders (See note 1)		$	(31,529	)	$	(14,227	)
Net (loss) income attributable to common stockholders (See note 1)								Net (loss) income attributable to common stockholders (See note 1)	$	(209,452	)	$	(28,313	)

Add:	Depreciation of real estate assets	37,381			33,037			Depreciation of real estate assets	39,775			35,717
	Amortization of acquired real estate intangible assets and deferred leasing costs	8,386			11,058			Depreciation of real estate assets attributable to joint ventures	8,982			9,123
	Net loss attributable to non-controlling interests (See note 2)	(59		)	216			Net (loss) income attributable to Class A Unitholders (See note 2)	(3,094		)	492
Less:	(Gain) loss on sale of real estate	—			(18,605		)
FFO attributable to common stockholders and unitholders	FFO attributable to common stockholders and unitholders	14,179			11,479			FFO attributable to common stockholders and unitholders	(163,789		)	17,019

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			—			Acquisition and pursuit costs	246			—
	Weather-related property operating losses	—			161			Loan cost amortization on acquisition term notes and loan coordination fees (See note 3)	678			487
	Non-cash equity compensation to directors and executives	305			796			Payment of costs related to property refinancing	—			55
	Amortization of loan closing costs (See note 4)	1,168			1,309			Internalization costs (See note 4)	178,793			45
	Depreciation/amortization of non-real estate assets	472			404			Noncash dividends on preferred stock	544			96
								Noncash (income) expense for current expected credit losses (See note 5)	4,530			—
								Extraordinary Event - COVID-19 Expense	29			—
								Earnest money forfeited by prospective asset purchaser	(2,750		)	—
Core FFO attributable to common stockholders and unitholders								Core FFO attributable to common stockholders and unitholders	18,281			17,702

Add:								Non-cash equity compensation to directors and executives	230			311
	Net loan fees received (See note 5)	148			248			Amortization of loan closing costs (See note 6)	1,166			1,131
	Accrued interest income received (See note 6)	—			4,298			Depreciation/amortization of non-real estate assets	556			449
	Internalization costs (See note 7)	818			—			Net loan fees received (See note 7)	267			401
	Loan loss allowance	—			3,029			Deferred interest income received (See note 8)	8,277			2,760
	Deemed dividends from cash redemptions of preferred stock	5			2			Amortization of lease inducements (See note 9)	439			428
	Amortization of lease inducements (See note 8)	435			387			Non-operational miscellaneous revenues	2,750			—
	Non-cash dividends on Preferred Stock	147			63			Cash received in excess of amortization of purchase option termination revenues (See note 10)	760			296
Less:	Non-cash loan interest income (See note 6)	(3,763		)	(4,104		)	Non-cash loan interest income (See note 8)	(3,019		)	(3,324		)
	Non-cash revenues from mortgage-backed securities	(281		)	(131		)	Cash received for sale of K Program securities in excess of noncash revenues	—			(141		)
	Cash paid for loan closing costs	(29		)	(25		)	Cash paid for loan closing costs	—			(3		)
	Amortization of purchase option termination revenues (See note 9)	(1,283		)	(4,478		)	Amortization of acquired real estate intangible liabilities and SLR (See note 11)	(4,653		)	(3,758		)
	Amortization of acquired above and below market lease intangibles							Amortization of deferred revenues (See note 12)	(940		)	(940		)
	and straight-line rental revenues (See note 10)	(4,293		)	(3,353		)	Normally recurring capital expenditures (See note 13)	(1,418		)	(1,180		)
	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
Adjusted funds from operations attributable to common stockholders and Unitholders								Adjusted funds from operations attributable to common stockholders and Unitholders	$	22,696		$	14,132

Common Stock dividends and distributions to Unitholders declared:	Common Stock dividends and distributions to Unitholders declared:							Common Stock dividends and distributions to Unitholders declared:
	Common Stock dividends	$	11,823		$	10,377		Common Stock dividends	$	12,491		$	11,195
	Distributions to Unitholders (See note 2)	225			272			Distributions to Unitholders (See note 2)	203			229
	Total	$	12,048		$	10,649		Total	$	12,694		$	11,424

Common Stock dividends and Unitholder distributions per share	Common Stock dividends and Unitholder distributions per share	$	0.2625		$	0.255		Common Stock dividends and Unitholder distributions per share	$	0.2625		$	0.26

FFO per weighted average basic share of Common Stock and Unit outstanding	FFO per weighted average basic share of Common Stock and Unit outstanding	$	0.31		$	0.28		FFO per weighted average basic share of Common Stock and Unit outstanding	$	(3.42	)	$	0.39
Core FFO per weighted average basic share of Common Stock and Unit outstanding								Core FFO per weighted average basic share of Common Stock and Unit outstanding	$	0.38		$	0.41
AFFO per weighted average basic share of Common Stock and Unit outstanding	AFFO per weighted average basic share of Common Stock and Unit outstanding	$	0.12		$	0.21		AFFO per weighted average basic share of Common Stock and Unit outstanding	$	0.47		$	0.32

Weighted average shares of Common Stock and Units outstanding: ^(A)	Weighted average shares of Common Stock and Units outstanding: ^(A)							Weighted average shares of Common Stock and Units outstanding: ^(A)
	Basic:	44,703			40,300			Basic:
	Common Stock	868			1,069			Common Stock	47,129			42,680
	Class A Units	45,571			41,369			Class A Units	827			880
	Common Stock and Class A Units							Common Stock and Class A Units	47,956			43,560

	Diluted Common Stock and Class A Units ^(B)	45,768			42,890			Diluted Common Stock and Class A Units ^(B)	47,957			44,199

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
Actual shares of Common Stock outstanding, including 7 and 6 unvested shares								Actual shares of Common Stock outstanding, including 7 and 6 unvested shares
of restricted Common Stock at March 31, 2020 and 2019, respectively.								of restricted Common Stock at March 31, 2020 and 2019, respectively.	47,585			43,244
Actual Class A Units outstanding at March 31, 2020 and 2019, respectively.								Actual Class A Units outstanding at March 31, 2020 and 2019, respectively.	775			879
	Total	46,211			41,872			Total	48,360			44,123

(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.
(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 1.72% weighted average non-controlling interest in the Operating Partnership for the three-month period ended March 31, 2020.								(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 1.72% weighted average non-controlling interest in the Operating Partnership for the three-month period ended March 31, 2020.
(B) Since our 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 and restricted stock units. 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.								(B) Since our 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 and restricted stock units. 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.~~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, Core FFO 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~~March 31, 2020 include activity for the properties acquired during the ~~quarter~~period only from their respective dates of acquisition. In addition, the ~~third~~first quarter ~~2019 period~~2020 includes activity for the properties acquired since ~~September 30, 2018.~~March 31, 2019. Rental and other property revenues and expenses for the ~~third~~first quarter ~~2018~~2019 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~~774,687 Class A Units as of ~~September 30, 2019.~~March 31, 2020. 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%~~1.72% and ~~2.59%~~2.02% for the three-month periods ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively.

We ~~pay~~paid loan coordination fees to Preferred Apartment Advisors, LLC, or our Former Manager, to reflect the administrative effort involved in arranging debt financing for acquired ~~properties.~~properties prior to the Internalization. The fees ~~are~~were 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 Core FFO and AFFO. At ~~September 30, 2019,~~March 31, 2020, aggregate unamortized loan coordination fees were approximately ~~$14.1~~$14.0 million, which will be amortized over a weighted average remaining loan life of approximately ~~10.4~~10.3 years.


4)	This adjustment reflects the add-back of consideration paid to the owners of the Former Manager and due diligence and pursuit costs incurred by the Company related to the internalization of the functions performed by the Former Manager.

Effective January 1, 2020, we adopted ASU 2016-03, which requires us to estimate the amount of future credit losses we expect to incur over the lives of our real estate loan investments at the inception of each loan. This loss reserve may be adjusted upward or downward over the lives of our loans and therefore the aggregate net adjustment for each period could be positive (removing the non-cash effect of a net increase in aggregate loss reserves) or negative (removing the non-cash effect of a net decrease in aggregate loss reserves) in these adjustments to FFO in calculating Core FFO.

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,~~March 31, 2020, aggregate unamortized loan costs were approximately ~~$25.1~~$25.2 million, which will be amortized over a weighted average remaining loan life of approximately 9.1 years.

5)7)

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 Core 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)8).


6)8)	This adjustment reflects the receipt during the periods presented of additional interest income (described in note 57 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)9)	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.

9)10)

Effective March 6, 2020, our purchase option on the Falls at Forsyth multifamily community was extinguished in conjunction with the loan repayment; 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~~community and the ~~Haven46 and~~ Haven Charlotte student housing ~~properties, all~~property, both 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~~$17.2 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 Core 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.quarters

ended March 31, 2020 and 2019, we had received cash in excess of recognized termination fee revenues, resulting in the positive adjustments shown to Core FFO in our calculation of AFFO.

~~10)~~11)

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 March 31, 2020, the balance of unamortized below-market lease intangibles was approximately $60.5 million, which will be recognized over a weighted average remaining lease period of approximately 9.1 years.

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)~~12)	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)~~13)

We deduct from Core FFO normally recurring capital expenditures that are necessary to maintain our assets’ revenue streams in the calculation of AFFO. This adjustment also deducts from Core FFO capitalized amounts for third party costs during the period to originate or renew leases in our grocery-anchored shopping centers and office buildings. This adjustment includes approximately $40,000 of recurring capitalized expenditures incurred at our corporate offices during the three months ended March 31, 2020. 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);

operating expenses related to salaries, benefits, and general and administrative expenses (that were formally funded by payment of fees to our Former Manager prior to Internalization on January 31, 2020);

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%~~4.57% for the ~~nine-month period~~three months ended ~~September 30, 2019.~~March 31, 2020. 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,~~

The COVID-19 pandemic has the potential to affect our short-term cash flows, if multifamily tenants lose their jobs due to business closings, smaller retailers fall behind on their rent obligations, and our office tenants' businesses begin to similarly suffer. Should these events continue to accelerate and worsen, our operational cash flows could suffer and cause us to draw upon our Revolving Credit Line more extensively and in a manner other than 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.intended.

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,~~March 31, 2020, 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 December 20, 2019, we utilized proceeds from an interim term loan to partially finance the acquisition of Morrocroft Centre, an office building located in Charlotte, North Carolina, or the 2019 Interim Term Loan. The 2019 Interim Term Loan accrued interest at a rate of LIBOR plus 170 basis points per annum. We repaid the 2019 Interim Term Loan during the first quarter 2020 with permanent mortgage financing.

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~~the 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 used by operating activities for the three-month period ended March 31, 2020 was approximately $69.4 million and net cash provided by operating activities for the ~~nine-month periods~~three-month period ended ~~September 30,~~March 31, 2019 ~~and 2018~~ was approximately ~~$124.4~~$26.4 million. The Internalization transaction reduced the Company’s operating cash flows by approximately $114 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.for the quarter ended March 31, 2020.

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 a decrease in the weighted average accrued interest rate for 2019 and full repayment ~~or settlement since September 30, 2018~~ of ~~9 real estate loan investments with an aggregate commitment amount~~the Haven Campus Communities Charlotte Member, LLC line of ~~$139.9 million which supported 6 real estate development projects.~~credit, in early 2019.

Our net cash used in investing activities for the ~~nine-month periods~~quarters ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ was approximately ~~$530.0~~$90.9 million and ~~$625.7~~$53.9 million, respectively. Cash disbursed for property acquisitions ~~decreased~~increased from ~~$662.9 million in the 2018 period to $442.4~~approximately $32.5 million in the 2019 period ~~partially offset by~~to $125.1 million in the ~~investing cash inflow from the sale of mortgage-backed securities of approximately $53.4 million.~~2020 period.

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~~three-month period ended ~~September 30, 2019,~~March 31, 2020, our capital expenditures for our multifamily communities, not including changes in related payables were as follows:


	Capital Expenditures												Capital Expenditures
	Recurring				Non-recurring				Total				Recurring				Non-recurring				Total
(In thousands, except per-unit amounts)	Amount		Per Unit		Amount		Per Unit		Amount		Per Unit		Amount		Per Unit		Amount		Per Unit		Amount		Per Unit
Appliances	$	366	$	36.52	$	—	$	—	$	366	$	36.52	$	176	$	16.87	$	—	$	—	$	176	$	16.87
Carpets	1,116		111.40		—		—		1,116		111.40		305		29.18		—		—		305		29.18
Wood flooring / vinyl	240		24.00		91		9.09		331		33.09		20		1.95		106		10.13		126		12.08
Blinds and ceiling fans	149		14.79		15		1.48		164		16.27		31		3.01		—		—		31		3.01
Fire safety	—		—		146		14.54		146		14.54		—		—		44		4.22		44		4.22
Furnace, air (HVAC)	419		41.77		13		1.27		432		43.04		61		5.83		—		—		61		5.83
Computers, equipment, misc.	10		1.04		201		20.07		211		21.11		5		0.48		57		5.47		62		5.95
Elevators	—		—		33		3.33		33		3.33		—		—		16		1.56		16		1.56
Exterior painting	—		—		833		83.15		833		83.15		—		—		628		60.11		628		60.11
Leasing office / common amenities	281		28.02		971		96.93		1,252		124.95		30		2.86		263		25.16		293		28.02
Major structural	—		—		1,886		188.17		1,886		188.17		—		—		407		38.94		407		38.94
Cabinets & countertop upgrades	—		—		548		54.70		548		54.70
Cabinets & countertops and unit upgrades													—		—		39		3.76		39		3.76
Landscaping & fencing	—		—		897		89.57		897		89.57		—		—		163		15.61		163		15.61
Parking lot	—		—		370		36.91		370		36.91		—		—		21		1.98		21		1.98
Signage and sanitation	—		—		94		9.39		94		9.39		—		—		19		1.84		19		1.84

	$	2,581	$	257.54	$	6,098	$	608.60	$	8,679	$	866.14	$	628	$	60.18	$	1,763	$	168.78	$	2,391	$	228.96

For the ~~nine-month~~three-month period ended ~~September 30, 2019,~~March 31, 2020, our capital expenditures for our student housing properties, not including changes in related payables were as follows:


	Capital Expenditures												Capital Expenditures
	Recurring				Non-recurring				Total				Recurring				Non-recurring				Total
(In thousands, except per-unit amounts)	Amount		Per Bed		Amount		Per Bed		Amount		Per Bed		Amount		Per Bed		Amount		Per Bed		Amount		Per Bed
Appliances	$	64	$	10.97	$	—	$	—	$	64	$	10.97	$	29	$	4.80	$	—	$	—	$	29	$	4.80
Carpets	207		35.58		—		—		207		35.58		7		1.13		—		—		7		1.13
Wood flooring / vinyl	5		0.81		30		5.14		35		5.95		—		—		—		—		—		—
Blinds and ceiling fans	26		4.50		—		—		26		4.50		2		0.27		—		—		2		0.27
Fire safety	—		—		151		26.04		151		26.04		—		—		—		—		—		—
Furnace, air (HVAC)	51		8.83		283		48.66		334		57.49		25		4.04		—		—		25		4.04
Computers, equipment, misc.	9		1.61		141		24.23		150		25.84		—		—		2		0.35		2		0.35
Elevators	—		—		—		—		—		—		—		—		5		0.84		5		0.84
Exterior painting	—		—		806		138.61		806		138.61		—		—		—		—		—		—
Leasing office / common amenities	26		4.39		314		54.03		340		58.42		2		0.33		13		2.10		15		2.43
Major structural	—		—		1,888		324.60		1,888		324.60		—		—		541		88.71		541		88.71
Cabinets & countertop upgrades	93		15.97		34		5.64		127		21.61
Cabinets & countertops and unit upgrades													—		—		2		0.31		2		0.31
Landscaping & fencing	—		—		478		82.22		478		82.22		—		—		54		8.78		54		8.78
Parking lot	—		—		79		13.66		79		13.66		—		—		—		—		—		—
Signage and sanitation	—		—		139		23.95		139		23.95		—		—		19		3.26		19		3.26
Unit furniture	291		50.06		—		—		291		50.06		162		26.63						162		26.63

	$	772	$	132.72	$	4,343	$	746.78	$	5,115	$	879.50	$	227	$	37.20	$	636	$	104.35	$	863	$	141.55

In addition, second-generation capital expenditures within our grocery-anchored shopping center portfolio for the ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2020 and 2019 totaled $432,000 and ~~2018 totaled $1.3 million and $1.0 million,~~$264,000, 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~~

"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~~three-month periods ended ~~September 30,~~March 31, 2020 and 2019 totaled $101,000 and ~~2018 totaled $465,000 and $116,000,~~$149,000, 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,~~March 31, 2020, we had restricted cash of approximately ~~$17.6~~$20.7 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 for the three-month periods ended March 31, 2020 and 2019 was approximately ~~$465.1~~$186.8 million and ~~$527.1~~$65.8 million, ~~for the nine-month periods ended September 30, 2019 and 2018,~~ respectively. Our significant financing cash sources were approximately ~~$329.9~~$89.4 million and ~~$386.6~~$128.6 million of net proceeds from the issuance of Preferred Stock for the 2020 and 2019 periods respectively, and approximately $81.4 million and $57.3 million of net proceeds from the mortgage financing transactions for the ~~nine-month~~2020 and 2019 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~~respectively. The decrease in proceeds from ~~our offerings~~the issuance of Preferred Stock in the 2020 period was related to the closure of our ~~Preferred Stock Units.~~$1.5 Billion Unit Offering during the quarter, as our Series A1/M1 offering was gaining traction as our primary equity raising vehicle.

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, mShares, Series A1 Redeemable Preferred Stock and Series M1 Redeemable Preferred Stock (collectively, our ~~mShares,~~Preferred Stock), 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,~~shares of Preferred Stock, less those shares redeemed.

Our ~~third~~first quarter ~~2019~~2020 Common Stock dividend declaration of $0.2625 per share represented an overall increase of ~~110%~~110.0% 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%~~12.6% 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~~quarter ended ~~September 30, 2019,~~March 31, 2020, our aggregate dividends and distributions totaled approximately ~~$41.5~~$45.8 million and our net cash ~~flows from~~used by operating activities were approximately ~~$49.8~~$69.4 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~~Series A1/M1 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~~September 27, 2019, our registration statement on Form S-3 (Registration No. ~~333-211924) for our offering for~~333-233576) (the “Series A1/M1 Registration Statement”) was declared effective by the Securities and Exchange Commission (the “SEC”). The Series A1/M1 Registration Statement allows us to offer up to ~~1,500,000 Units, with each Unit consisting~~a maximum of ~~one share~~1,000,000 shares of Series AA1 Redeemable Preferred Stock, ~~and one Warrant to purchase up to 20 shares~~Series M1 Redeemable Preferred Stock or a combination of ~~Common Stock, referred to as our $1.5 Billion Unit Offering.~~both. The stated price per ~~Unit~~share is $1,000, subject to adjustment ifunder certain conditions. The shares are being offered by our affiliate, Preferred Capital Securities, LLC (“PCS”), on a ~~participating broker-dealer reduces its commission. We~~"reasonable best efforts" basis and we intend to invest substantially all the net proceeds of the ~~$1.5 Billion Unit~~Series A1/M1 Offering in connection with the acquisition of multifamily communities, ~~student housing communities,~~ grocery-anchored shopping centers, office buildings, real estate loans and mortgages, 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,~~March 31, 2020, the Company's active equity offerings consisted of:

an offering of ~~a maximum of~~up to 1,000,000 ~~shares~~Shares of Series A1 Redeemable Preferred Stock ("Series A1 Preferred Stock"), Series M1 Redeemable Preferred Stock ("Series M1 Preferred ~~Stock,~~Stock"), or a combination of both ~~under~~(collectively the ~~Series~~"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

For the ~~three months and nine months~~three-month period ended ~~September 30, 2019,~~March 31, 2020, 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 $1.5 Billion Unit Offering expired on February 14, 2020.

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.In addition, the impacts of the COVID-19 pandemic on capital markets, including the availability and costs of debt and equity capital, remain uncertain and may have material adverse effects on our access to capital on attractive terms.

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,~~March 31, 2020, our outstanding debt (both secured and unsecured) was approximately ~~51%~~53% of the value of our tangible assets on a portfolio basis based on our estimates of fair market value at ~~September 30, 2019.~~March 31, 2020. 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,~~March 31, 2020, 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,~~March 31, 2020, we had approximately ~~$86.2~~$120.1 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,~~March 31, 2020, we had ~~1,454,906~~1,543,260 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,~~March 31, 2020, a total of ~~526,199~~531,522 Warrants had been exercised into ~~10,523,980~~10,630,440 shares of Common stock. The ~~1,454,906~~1,543,260 Warrants outstanding at ~~September 30, 2019~~March 31, 2020 have exercise prices that range between ~~$13.10~~$14.80 and $26.34 per share. If all the Warrants outstanding at ~~September 30, 2019~~March 31, 2020 became exercisable and were exercised, gross proceeds to us would be approximately ~~$558.6~~$602.8 million and we would as a result issue an additional ~~29,098,120~~30,865,200 shares of Common Stock.

Contractual Obligations

As of ~~September 30, 2019,~~March 31, 2020, 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%~~1.0% at ~~September 30, 2019,~~March 31, 2020, 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			Total		Less than one year		1-3 years		3-5 years		More than five years
Mortgage debt obligations:	Mortgage debt obligations:											Mortgage debt obligations:
Interest		831,264		103,654		190,854		159,485		377,271			$	826,087	$	105,608	$	192,171	$	172,795	$	355,513
Principal		2,604,479		133,288		336,580		371,061		1,763,550			2,648,990		46,527		453,397		544,327		1,604,739
Line of Credit:
2019 Interim Term Loan:
Interest		8		8		—		—		—			413		413		—		—		—
Principal		50,000		50,000		—		—		—			191,500		191,500		—		—		—
Office space and equipment leases													—		—		—		—		—
Total		$	3,485,751	$	286,950	$	527,434	$	530,546	$	2,140,821		$	3,666,990	$	344,048	$	645,568	$	717,122	$	1,960,252

In addition, we had unfunded real estate loan balances totaling approximately ~~$74.7~~$62.9 million at ~~September 30, 2019.~~March 31, 2020.


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,~~March 31, 2020, 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		Balance (in thousands)		Percentage of total mortgage indebtedness		LIBOR Cap		All-in Cap
Avenues at Creekside	$	39,077			5.0	%	6.6	%	$	38,664			5.00	%	6.6	%
The Tradition	30,000				3.3	%	7.0	%	30,000				3.25	%	7.0	%
The Bloc	28,966				3.3	%	6.8	%	28,966				3.25	%	6.8	%
Total capped floating-rate debt	98,043		3.8	%					97,630		3.7	%

Ursa	31,400				n/a		n/a
Haven 49	41,550				n/a		n/a
Champions Village	27,400				n/a		n/a		27,400
Fairfield Shopping Center	19,750								19,750
Total uncapped floating-rate debt	120,100		4.6	%					47,150		1.8	%

Total floating-rate debt	$	218,143	8.4	%					$	144,780	5.5	%

Our Revolving Line of Credit accrued interest at a spread of 3.0% over LIBOR as of ~~September 30, 2019;~~March 31, 2020; 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,~~March 31, 2020, would increase by approximately ~~$1.6~~$0.9 million or decrease by approximately ~~$1.3~~$1.0 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,~~March 31, 2020, 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~~March 31, 2020 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.

PART II


Item 1.	Legal Proceedings

Neither we nor our subsidiaries nor, to our knowledge, our Former Manager is currently subject to any legal proceedings that we or our Former 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~~The Company is supplementing the risk factors set forth under Item 1A. Risk Factors in ~~the section entitled "Risk Factors" in our~~its Annual Report on Form 10-K for the ~~twelve months~~year ended December 31, ~~2018 that was filed~~2019 ("2019 Annual Report") with the ~~SEC~~additional risk factor set forth below. This supplemental risk factor should be read in conjunction with the risk factors set forth in the 2019 Annual Report.

The current outbreak of the novel coronavirus, (“COVID-19”), or the future outbreak or pandemic of any other highly infectious or contagious diseases, could have a material and adverse effect on or cause disruption to the Company’s business or financial condition, results of operations, cash flows and the market value and trading price of the Company’ securities.

A novel strain of coronavirus was reported to have surfaced in Wuhan, China in December 2019, and has since spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March ~~1, 2019.~~13, 2020, the United States declared a national emergency. Since that time, efforts to contain the spread of COVID-19 have intensified. Several countries, including the United States, have taken steps to restrict travel, temporarily close businesses and issue quarantine orders, and it remains unclear how long such measures will remain in place. As a result, the COVID-19 pandemic is negatively affecting almost every industry directly or indirectly.

Impact of COVID-19 on Our Operations

Our operating results depend, in large part, on revenues derived from leasing apartment homes in our communities to residential tenants, the ability of our residents to earn sufficient income to pay their rents in a timely manner, the extent to which we waive late and other customary fees associated with the apartment rental process, and our ability to limit bad debt and maintain operating results by evicting and re-leasing apartment homes when residents remain delinquent in their payment of rent. Additionally, a prolonged imposition of mandated closures or other social-distancing guidelines may adversely impact our retail and office tenants’ ability to generate sufficient revenues, and could force tenants to default on their leases, or result in the tenant’s bankruptcy or insolvency, which would diminish the Company’s ability to receive rental revenue it is owed under their leases. The rapid development and fluidity of the pandemic precludes any prediction as to the ultimate adverse impact on the Company. A number of the our office and retail tenants have announced mandated or temporary closures of their operations and/or have requested adjustments to their lease terms during this pandemic. Experts predict that the COVID-19 pandemic will trigger a period of global economic slowdown or a global recession. COVID-19 (or a future pandemic) could have a material and adverse effect on or cause disruption to our business or financial condition, results from operations, cash flows and the market value and trading price of our common stock due to, among other factors:

A complete or partial closure of, or other operational issues at the Company’s properties as a result of government or tenant action;

In the event of resident nonpayment, default or bankruptcy, the uncollectibility of rent could increase and we may not be able to re-lease apartment homes at current or projected rents. Our occupancy levels and pricing across our portfolio may decline due to changes in demand or logistical challenges in showing or leasing apartment homes to prospective residents, including restrictions inhibiting our employees’ ability to meet with existing or potential residents;

Our properties may also incur significant costs or losses related to shelter-in-place orders, quarantines, infection, clean-up costs or other related factors;

The declines in or instability of the economy or financial markets may result in a recession or negatively impact consumer discretionary spending, which could adversely affect retailers and consumers;

The reduction of economic activity may severely impact our office and retail tenants' business operations, financial condition, liquidity and access to capital resources and may cause one or more of our tenants to be unable to meet their obligations to us in full, or at all, to default on their lease, or to otherwise seek modifications of such obligations;

A general decline in business activity and demand for real estate transactions would adversely affect the Company’s ability to successfully execute investment strategies or expand its portfolio; and

The potential negative impact on the health of the Company’s associates or Board of Directors, particularly if a significant number are impacted, or the impact of government actions or restrictions, including stay-at-home orders, restricting access to our headquarters located in Atlanta, Georgia, could result in a deterioration in our ability to ensure business continuity during a disruption.

The extent to which COVID-19 impacts our operations and those of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the outbreak, the actions taken to contain the outbreak or mitigate its impact, and the direct and indirect economic effects of the outbreak and containment measures, among others. COVID-19presents material uncertainty and risk with respect to our performance, business or financial condition, results from operations and cash flows.

Impact of COVID-19 on Liquidity and Financing

As a result of the current economic downturn, the real estate market may be unable to attract the same level of capital investment that it attracted before the COVID-19 pandemic, and there may be a reduction in the number of companies seeking to acquire properties, which may result in the value of our properties not appreciating, or decreasing significantly below the amount for which we acquired or developed them. This may also limit our ability to sell our properties, realize a cash return on our investment and reinvest the sales proceeds in new properties. In light of the severe economic, market and other disruptions worldwide being caused by the COVID-19 pandemic, there can be no assurance that conditions in the bank lending, capital and other financial markets will not continue to deteriorate as a result of the pandemic, or that our access to capital and other sources of funding will not become constrained, which could adversely affect the availability and terms of future borrowings, renewals or refinancings.

Additional financial impacts include the following:

A significant reduction in our cash flows could impact the Company’s ability to continue paying cash dividends to its common and preferred stockholders at expected levels or at all;

Increased redemption activity by holders of our preferred stock could impact our cash availability and liquidity strength and, to the extent we make redemptions of our Preferred Stock in shares of our Common Stock, further dilute stockholder’s ownership interests; and

The financial impact of COVID-19 could negatively affect the Company’s future compliance with financial and other covenants of the Company’s credit facility and other debt instruments, and the failure to comply with such covenants could result in a default that accelerates the payment of such indebtedness


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~~2.1		~~Articles Supplementary for the Series A1 Redeemable~~Stock Purchase Agreement, dated as of January 31, 2020, by and among Preferred ~~Stock~~Apartment Communities, Inc., Preferred Apartment Communities Operating Partnership, L.P., PAC Carveout, LLC, NELL Partners, Inc., NMA Holdings, Inc., Mortwat, LLC, Northside Partners Trust, Nancy Ann Richardson Williams 2017 Children’s Trust, Caitboo Family Trust, Fairmont Green Trust, and Murphy Capital and Advisory Group LLC (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~~2.1 to Form 8-K filed by the Company with the Securities and Exchange Commission on ~~October 2, 2019)~~February 3, 2020).
10.1	+	Consulting Agreement between Leonard A. Silverstein and Preferred Apartment Communities, Inc. (incorporated by reference to Exhibit 10.20 to Form 10-K filed by the Company with the Securities and Exchange Commission on March 3, 2020)
31.1	*	Certification of ~~Daniel M. DuPree,~~Joel T. Murphy, 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,~~March 31, 2020 formatted in XBRL: (i) ~~Consolidated~~Condensed consolidated balance sheets at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, (ii) Condensed consolidated statements of operations for the three months ended March 31, 2020 and ~~nine months ended September 30,~~ 2019, ~~and 2018,~~ (iii) Condensed consolidated statements of stockholders' equity, (iv) Condensed consolidated statement of cash flows and (v) ~~notes~~Notes to condensed 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~~May 11, 2020	By:	/s/ ~~Daniel M. DuPree~~Joel T. Murphy
		~~Daniel M. DuPree~~Joel T. Murphy
		Chief Executive Officer
		(Principal Executive Officer)

Date: ~~November 4, 2019~~May 11, 2020	By:	/s/ John A. Isakson
		John A. Isakson
		Chief Financial Officer
		(Principal Financial Officer)

8169



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



	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



(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



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



	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



(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	%



	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	%