BUY (APTS, $8.83)
Mezzanine Loan Portoflio Offers Unique Property Acquisition Pipeline. Initiating With A BUY Rating and $11 Price Target
August 12, 2014
John R. Benda
Investment Conclusion. We are initiating coverage of Preferred Apartment Communities Inc. with a BUY rating and $11.0 price target. APTS is attractive at its current valuation as it is actively growing its apartment property portfolio and its mezzanine and investment loan portfolios provide a meaningful ancillary revenue stream, which helps support the dividend as APTS works through the apartment portfolio growth process. APTS’ mezzanine loan program is a unique sourcing vehicle that will help drive shareholder total return from the 8% current and 6% deferred interest APTS collects on the loans. Our price target is derived from a 50/50 blend of our $9.89 Net Asset Value (“NAV”) estimate and $12.48 Dividend Discount Model (“DDM”) estimate. Our $11.00 target price implies an annual total return, including the current 7.2% dividend yield, of 31.9% at the current stock price of $8.83.
Source: Capital IQ, National Securities Corporation Estimates
Mezzanine Loan Program a Differentiator in Space.. At 1Q14 APTS held $115.26mln in its financing segment that consists of a portfolio of mezzanine loans, bridge loans, construction loans and other financial instruments which partially finance the development, construction and pre-stabilization carrying costs of new multifamily communities and other real estate and real estate related assets. These loans accrue interest at an 8% current and 6% deferred amount, some $36 mln in interest altogether.. Intra-quarter in April, APTS added an additional $13.2 mln of investment loans to its portfolio, 11% of its $115 mln 1Q14 balance. Forward in our model we assume APTS puts on an additional $10 mln in loans at its most recent 8.5% current and 4.3% deferred interest rate. Altogether, APTS’ current portfolio of $115 mln at 1Q14 will have generated some $36.3 mln for shareholders from origination to maturity...
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