Preferred Apartment Communities 10Q 2021 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2021

☐ 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

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ 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 ☒ 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 ☒

The number of shares outstanding of the registrant’s Common Stock, as of November 2, 2021 was 52,946,153.


PART I - FINANCIAL INFORMATION

INDEX


Item 1.	Financial Statements	Page No.

	Condensed Consolidated Balance Sheets (unaudited) – as of September 30, 2021 and December 31, 2020	2

	Condensed Consolidated Statements of Operations (unaudited) – Three and Nine Months Ended September 30, 2021 and 2020	3

	Condensed Consolidated Statements of Stockholders' Equity (unaudited) – Three and Nine Months Ended September 30, 2021 and 2020	4

	Condensed Consolidated Statements of Cash Flows (unaudited) – Nine Months Ended September 30, 2021 and 2020	8

	Notes to Condensed Consolidated Financial Statements (unaudited)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	74

Item 4.	Controls and Procedures	75

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	75

Item 1A.	Risk Factors	75

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75

Item 3.	Defaults Upon Senior Securities	75

Item 4.	Mine Safety Disclosures	75

Item 5.	Other Information	75

Item 6.	Exhibits	76


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

(In thousands, except per-share par values)	September 30, 2021		December 31, 2020
Assets
Real estate
Land	$	553,123	$	605,282
Building and improvements	2,705,489		3,034,727
Tenant improvements	122,341		184,288
Furniture, fixtures, and equipment	358,002		306,725
Construction in progress	5,595		12,269
Gross real estate	3,744,550		4,143,291
Less: accumulated depreciation	(553,697)		(509,547)
Net real estate	3,190,853		3,633,744
Real estate loan investments, net of deferred fee income and allowance for expected
credit loss of $9,350 and $10,261	181,623		279,895
Total real estate and real estate loan investments, net	3,372,476		3,913,639

Cash and cash equivalents	54,568		28,657
Restricted cash	54,010		47,059
Promissory notes receivable (including 9,011 and 9,011 from related parties)	9,011		10,874
Accrued interest receivable on real estate loans	15,754		22,528
Acquired intangible assets, net of amortization of $164,216 and $169,718	67,897		127,138
Tenant lease inducements, net of amortization of $6,666 and $5,350	16,863		18,206
Investment in unconsolidated joint venture	6,101		6,657
Tenant receivables and other assets	62,355		106,321

Total assets	$	3,659,035	$	4,281,079

Liabilities and equity
Liabilities
Mortgage notes payable, net of deferred loan costs and mark-to-market adjustment of $40,638 and $46,241	$	2,384,583	$	2,594,464
Revolving line of credit	—		22,000
Deferred revenue	33,139		36,733
Accounts payable and accrued expenses	51,380		41,912
Deferred liability to Former Manager	23,856		23,335
Contingent liability due to Former Manager	14,682		14,814
Accrued interest payable	6,638		7,877
Dividends and partnership distributions payable	19,797		20,137
Acquired below market lease intangibles, net of amortization of $35,540 and $34,006	37,097		51,934
Prepaid rent, security deposits, and other liabilities	27,769		29,425
Total liabilities	2,598,941		2,842,631

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 shares
issued; 1,344 and 1,735 shares outstanding at September 30, 2021 and December 31, 2020, respectively	13		17
Series A1 Redeemable Preferred Stock, $0.01 par value per share; up to 1,000 shares authorized; 247 and 149 shares
issued; 246 and 149 shares outstanding at September 30, 2021 and December 31, 2020, respectively	2		1
Series M Redeemable Preferred Stock, $0.01 par value per share; 500 shares authorized; 106 shares issued;
84 and 89 shares outstanding at September 30, 2021 and December 31, 2020, respectively	1		1
Series M1 Redeemable Preferred Stock, $0.01 par value per share; up to 1,000 shares authorized; 34 and 19
shares issued; 32 and 19 shares outstanding at September 30, 2021 and December 31, 2020, respectively	—		—
Common Stock, $0.01 par value per share; 400,067 shares authorized; 52,897 and 49,994 shares issued and
outstanding at September 30, 2021 and December 31, 2020, respectively	529		500
Additional paid-in capital	1,245,640		1,631,646
Accumulated (deficit) earnings	(183,562)		(192,446)
Total stockholders' equity	1,062,623		1,439,719
Non-controlling interest	(2,529)		(1,271)
Total equity	1,060,094		1,438,448

Total liabilities and equity	$	3,659,035	$	4,281,079

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,
	2021		2020		2021		2020
Revenues:
Rental and other property revenues	$	99,050	$	114,831	$	308,670	$	338,271
Interest income on loans and notes receivable	11,241		10,649		34,567		34,495
Interest income from related parties	415		609		1,230		3,750
Miscellaneous revenues	306		363		951		3,798
Total revenues	111,012		126,452		345,418		380,314

Operating expenses:
Property operating and maintenance	14,956		19,437		45,785		53,566
Property salary and benefits (including reimbursements of
$0, $0, $0 and $1,430 to related party)	4,929		6,054		14,664		16,965
Property management costs (including $0, $0, $0 and $894 to related parties)	757		983		2,789		4,028
Real estate taxes and insurance	14,506		16,369		46,155		48,831
General and administrative	7,772		7,203		23,007		20,978
Equity compensation to directors and executives	817		582		2,316		1,058
Depreciation and amortization	39,639		51,794		130,198		153,096
Asset management and general and administrative expense fees to related party	—		—		—		3,099
Allowance for expected credit losses	265		(152)		(58)		5,463
Management Internalization expense	242		577		727		179,828
Total operating expenses	83,883		102,847		265,583		486,912

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

Net operating expenses	83,883		102,847		265,583		485,776

Operating income (loss) before gains on sales of real estate and loss from unconsolidated joint venture	27,129		23,605		79,835		(105,462)
Loss from unconsolidated joint venture	(187)		(120)		(556)		(120)
Gain on sale of real estate, net	7,942		3,261		8,740		3,261
Operating income (loss)	34,884		26,746		88,019		(102,321)
Interest expense	24,847		29,879		79,134		90,608
Loss on extinguishment of debt	—		(518)		—		(6,674)
Gain on land condemnation	—		49		—		528
Loss on sale of real estate loan investment	(12)		—		(12)		—

Net income (loss)	10,025		(3,602)		8,873		(199,075)
Net (income) loss attributable to non-controlling interests	(48)		108		11		3,515

Net income (loss) attributable to the Company	9,977		(3,494)		8,884		(195,560)

Dividends to preferred stockholders	(57,859)		(35,909)		(125,662)		(104,601)
Earnings attributable to unvested restricted stock	(117)		(96)		(397)		(109)

Net loss attributable to common stockholders	$	(47,999)	$	(39,499)	$	(117,175)	$	(300,270)


Net loss per share of Common Stock available to common stockholders, basic and diluted	$	(0.92)	$	(0.79)	$	(2.30)	$	(6.21)


Weighted average number of shares of Common Stock outstanding, basic and diluted	52,455		49,689		51,011		48,351

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, 2021
(Unaudited)

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

Balance at July 1, 2021	$	19	$	517	$	1,543,665	$	(193,539)	$	1,350,662	$	(282)	$	1,350,380
Issuance of Preferred Stock	—		—		36,882		—		36,882		—		36,882
At-the-market issuance of common stock	—		12		12,858		—		12,870		—		12,870
Redemptions of Preferred Stock	(3)		—		(275,381)		—		(275,384)		—		(275,384)
Syndication and offering costs	—		—		(6,003)		—		(6,003)		—		(6,003)
Equity compensation to executives and directors	—		—		778		—		778		—		778
Vesting of restricted stock	—		—		—		0		—		0		—
Conversion of Class A Units to common stock	—		—		14		—		14		(14)		—
Current period amortization of Class B Units	—		—		—		—		—		39		39
Net income	—		—		—		9,977		9,977		48		10,025
Reallocation of non-controlling interest to Class A Unitholders	—		—		118		—		118		(118)		—
Distributions to non-controlling interests	—		—		—		—		—		(2,115)		(2,115)
Distributions to Class A Unitholders	—		—		—		—		—		(87)		(87)
Dividends to preferred stockholders (see note 7)	—		—		(57,859)		—		(57,859)		—		(57,859)
Dividends to common stockholders (see note 7)	—		—		(9,432)		—		(9,432)		—		(9,432)
Balance at September 30, 2021	$	16	$	529	$	1,245,640	$	(183,562)	$	1,062,623	$	(2,529)	$	1,060,094

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, 2020
(Unaudited)

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


Balance at July 1, 2020	$	21	$	493	$	1,917,212	$	(206,724)	$	1,711,002	$	(1,006)	$	1,709,996
Issuance of Preferred Stock	—		—		42,352		—		42,352		—		42,352
At-the-market issuance of common stock	—		6		4,608		—		4,614		—		4,614
Redemptions of Preferred Stock	—		—		(33,823)		—		(33,823)		—		(33,823)
Syndication and offering costs	—		—		(4,127)		—		(4,127)		—		(4,127)
Equity compensation to executives and directors	—		—		512		—		512		—		512
Conversion of Class A Units to common stock	—		—		(2)		—		(2)		2		—
Current period amortization of Class B Units	—		—		—		—		—		70		70
Net loss	—		—		—		(3,494)		(3,494)		(108)		(3,602)
Contributions from non-controlling interests	—		—		—		—		—		(98)		(98)
Reallocation of non-controlling interest to Class A Unitholders	—		—		202		—		202		(202)		—
Distributions to non-controlling interests	—		—		—		—		—		(119)		(119)
Distributions to Class A Unitholders	—		—		—		—		—		(132)		(132)
Dividends to preferred stockholders (see note 7)	—		—		(35,909)		—		(35,909)		—		(35,909)
Dividends to common stockholders (see note 7)	—		—		(8,876)		—		(8,876)		—		(8,876)
Balance at September 30, 2020	$	21	$	499	$	1,882,149	$	(210,218)	$	1,672,451	$	(1,593)	$	1,670,858

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, 2021
(Unaudited)

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

Balance at January 1, 2021	$	19	$	500	$	1,631,646		$	(192,446)	$	1,439,719	$	(1,271)	$	1,438,448
Issuance of Preferred Stock	1		—		112,589			—		112,590		—		112,590
At-the-market issuance of common stock	—		26		27,949			—		27,975		—		27,975
Redemptions of Preferred Stock	(4)		—		(358,691)			—		(358,695)		—		(358,695)
Syndication and offering costs	—		—		(15,462)			—		(15,462)		—		(15,462)
Equity compensation to executives and directors	—		—		2,194			—		2,194		—		2,194
Vesting of restricted stock	—		1		(1)			—		—		—		—
Conversion of Class A Units to common stock	—		2		1,353			—		1,355		(1,355)		—
Current period amortization of Class B Units	—		—		—			—		—		—		—
Net income (loss)	—		—		—			8,884		8,884		(11)		8,873
Reallocation of non-controlling interest to Class A Unitholders	—		—		(2,593)			—		(2,593)		2,593		—
Distributions to non-controlling interests	—		—		—			—		—		(2,215)		(2,215)
Distributions to Class A Unitholders	—		—		—			—		—		(270)		(270)
Dividends to preferred stockholders (see note 7)	—		—		(125,662)			—		(125,662)		—		(125,662)
Dividends to common stockholders (see note 7)	—		—		(27,682)			—		(27,682)		—		(27,682)
Balance at September 30, 2021	$	16	$	529	$	1,245,640	$1245640000	$	(183,562)	$	1,062,623	$	(2,529)	$	1,060,094

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, 2020
(Unaudited)

(In thousands, except dividend per-share figures)	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 Preferred Stock	2			—		175,429		—		175,431		—		175,431��
At-the-market issuance of common stock	—			6		4,608		—		4,614		—		4,614
Exercises of warrants	—			—		8		—		8		—		8
Redemptions of Preferred Stock	(2)			28		(82,058)		—		(82,032)		—		(82,032)
Syndication and offering costs	—			—		(20,775)		—		(20,775)		—		(20,775)
Equity compensation to executives and directors	—			—		864		—		864		—		864
Conversion of Class A Units to common stock	—			1		1,381		—		1,382		(1,382)		—
Current period amortization of Class B Units	—			—		—		—		—		194		194
Net loss	—			—		—		(195,560)		(195,560)		(3,515)		(199,075)
Contributions from non-controlling interests	—			—		—		—		—		103		103
Reallocation of non-controlling interest to Class A Unitholders	—			—		(773)		—		(773)		773		—
Distributions to non-controlling interests	—			—		—		—		—		(119)		(119)
Distributions to Class A Unitholders	—			—		—		—		—		(465)		(465)
Dividends to preferred stockholders (see note 7)	—			—		(104,601)		—		(104,601)		—		(104,601)
Dividends to common stockholders (see note 7)	—			—		(29,991)		—		(29,991)		—		(29,991)
Balance at September 30, 2020	$	21	21	$	499	$	1,882,149	$	(210,218)	$	1,672,451	$	(1,593)	$	1,670,858

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


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

(In thousands)	Nine-month periods ended September 30,
	2021		2020
Operating activities:
Net income (loss)	$	8,873	$	(199,075)
Reconciliation of net loss to net cash provided by (used in) operating activities:
Depreciation and amortization expense	130,198		153,096
Amortization of above and below market leases	(4,374)		(6,145)
Amortization of deferred revenues and other non-cash revenues	(4,195)		(3,710)
Amortization of purchase option termination fees	(7,074)		(4,896)
Amortization of equity compensation, lease incentives and other non-cash expenses	4,284		3,027
Deferred loan cost amortization	4,903		5,177
Non-cash accrued interest income on real estate loan investments	(7,958)		(9,208)
Receipt of accrued interest income on real estate loan investments	14,732		10,179
Gains on sale of real estate, real estate loan and land, net	(8,728)		(3,789)
Loss from unconsolidated joint ventures	556		120
Cash received for purchase option terminations	9,851		4,800
Loss on extinguishment of debt	—		6,674
(Decrease) increase in allowance for expected credit losses	(260)		5,463
Changes in operating assets and liabilities:
Decrease (increase) in tenant receivables and other assets	2,344		(16,151)
Increase in accounts payable and accrued expenses	19,160		46,821
Increase in deferred liability to Former Manager	—		22,851
Increase in contingent liability	—		15,013
Increase (decrease) in accrued interest, prepaid rents and other liabilities	2,573		(249)
Net cash provided by (used in) operating activities	164,885		29,998

Investing activities:
Investments in real estate loans, net of origination fees	(44,635)		(41,311)
Repayments of real estate loans	132,970		71,146
Proceeds from sale of real estate loan investment	12,706		—
Notes receivable repaid (issued)	1,863		14,219
Related party notes and line of credit repaid (issued)	—		(5,078)
Acquisition of properties	(335,206)		(187,197)
Disposition of properties, net	330,856		787
Proceeds from sale of interest in a joint venture	—		19,221
Return of capital from investment in unconsolidated joint venture	—		12,250
Capital improvements to real estate assets	(24,457)		(38,784)
Investment in property development	(546)		(424)
Net cash provided by (used in) investing activities	73,551		(155,171)


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


Preferred Apartment Communities, Inc.
Consolidated Statements of Cash Flows - continued
(Unaudited)
(In thousands)	Nine-month periods ended September 30,
	2021		2020

Financing activities:
Proceeds from mortgage notes payable	286,495		377,749
Repayments of mortgage notes payable	(76,343)		(173,409)
Payments for deposits and other mortgage loan costs	(5,461)		(10,911)
Payments for debt prepayment and other debt extinguishment costs	—		(5,733)
Proceeds from Revolving Line of Credit	283,000		321,000
Payments on Revolving Line of Credit	(305,000)		(288,000)
Repayment of the Term Loan	—		(70,000)
Proceeds from sales of Preferred Stock, net of offering costs	101,960		159,096
Payments for redemptions of preferred stock	(358,620)		(82,003)
Proceeds from sale of Common Stock	27,553		4,546
Common Stock dividends paid	(26,911)		(33,271)
Preferred stock dividends and Class A Unit distributions paid	(127,086)		(104,428)
Payments for deferred offering costs	(2,946)		(10,669)
Distributions to non-controlling interests	(2,215)		(20)
Net cash (used in) provided by financing activities	(205,574)		83,947

Net increase (decrease) in cash, cash equivalents and restricted cash	32,862		(41,226)
Cash, cash equivalents and restricted cash, beginning of year	75,716		137,253
Cash, cash equivalents and restricted cash, end of period	$	108,578	$	96,027

Supplemental cash flow information:
Cash paid for interest	$	74,874	$	84,172

Supplemental disclosure of non-cash investing and financing activities:
Accrued capital expenditures	$	1,302	$	6,067
Noncash extinguishment of notes receivable	$	—	$	20,865
Dividends payable - Common Stock	$	9,696	$	8,876
Dividends payable - Preferred Stock	$	10,101	$	12,095
Reclass of offering costs from deferred asset to equity	$	4,468	$	4,338
Noncash contribution of property into unconsolidated joint venture	$	—	$	38,443
Fair value issuances of equity compensation	$	6,648	$	6,461
Noncash repayment of mortgages through refinance	$	78,181	$	86,669
Operating lease liabilities assumed from Former Manager	$	—	$	15,912
Mortgages assumed by purchaser of property	$	425,636	$	—

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

Preferred Apartment Communities, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

1. Organization and Basis of Presentation

Preferred Apartment Communities, Inc. (NYSE: APTS), or the Company, is a real estate investment trust engaged primarily in the ownership and operation of Class A multifamily properties, with select investments in grocery-anchored shopping centers. Preferred Apartment Communities’ investment objective is to generate attractive, stable returns for stockholders by investing in income-producing properties and acquiring or originating real estate loans. As of September 30, 2021, the Company owned or was invested in 107 properties in 13 states, predominantly in the Southeast region of the United States. 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 was externally managed and advised by Preferred Apartment Advisors, LLC, or its Former Manager, a Delaware limited liability company and related party until January 31, 2020 (see Note 6). We refer to this transaction as the Internalization.

As of September 30, 2021, the Company had 52,897,104 shares of common stock, par value $0.01 per share, or Common Stock, issued and outstanding and was the approximate 99.1% owner of Preferred Apartment Communities Operating Partnership, L.P., or the Operating Partnership, at that date. The number of partnership units not owned by the Company totaled 496,269 at September 30, 2021 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 controlled the Operating Partnership through its sole general partner interest and 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 subsidiary of the Operating Partnership. Carveout 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, 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 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 owned and conducted the business of our portfolio of off-campus student housing communities until the sale of all our student housing communities on November 3, 2020. Each of these entities are or were indirect subsidiaries of the Operating Partnership.

Basis of Presentation

These consolidated financial statements include all of the accounts of the Company and the Operating Partnership. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not contain all disclosures required by accounting principles generally accepted in the United States of America, or 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, 2020. 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 and nine months ended September 30, 2021 and 2020 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.

The potential reach, severity and duration of impacts of the COVID-19 pandemic, and developments related to any variants, 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.

Preferred Apartment Communities, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

Reclassification Adjustments

The Company recorded certain reclassification adjustments on its Condensed Consolidated Statement of Operations for the three-month and nine-month periods ended September 30, 2020 to conform the prior period presentation to the current presentation as shown in the table below. The adjustment is made to present sublease income received by the Company for a portion of its corporate office space as a net adjustment against rent expense, which is included in the general and administrative expense line on the consolidated statements of operations. Additionally, an adjustment has been made to present certain expenses such as franchise taxes and insurance claims within the real estate taxes and insurance line on the consolidated statements of operations. These reclassification adjustments had no effect on previously-reported net loss attributable to common stockholders.


	For the three-month period ended September 30, 2020
(in thousands)	As reported in Quarterly Report on Form 10-Q at September 30, 2020		Reclassification adjustments		As reported in Quarterly Report on Form 10-Q at September 30, 2021
Revenues:
Miscellaneous revenues	$	608	$	(245)	$	363

Operating expenses:
Property operating and maintenance	$	19,278	$	159	$	19,437
Real estate taxes and insurance	$	16,078	$	291	$	16,369
General and administrative	$	7,898	$	(695)	$	7,203


	For the nine-month period ended September 30, 2020
(in thousands)	As reported in Quarterly Report on Form 10-Q at September 30, 2020		Reclassification adjustments		As reported in Quarterly Report on Form 10-Q at September 30, 2021
Revenues:
Miscellaneous revenues	$	4,560	$	(762)	$	3,798

Operating expenses:
Property operating and maintenance	$	52,919	$	647	$	53,566
Real estate taxes and insurance	$	48,109	$	722	$	48,831
General and administrative	$	23,109	$	(2,131)	$	20,978

Preferred Apartment Communities, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

2.Summary of Significant Accounting Policies

The Company's significant accounting policies have not changed materially from those described in its Annual Report on Form 10-K as of December 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 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.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

3. Real Estate Assets

The Company's real estate assets consisted of:


	As of:
	September 30, 2021	December 31, 2020
Residential Properties:
Properties (1,2)	41	37
Units	12,052	11,143
New Market Properties:
Properties (2)	54	54
Gross leasable area (square feet) (3)	6,208,278	6,208,278
Preferred Office Properties: (4)
Properties (2)	3	9
Rentable square feet	1,241,000	3,169,000
Land	1	2
Rentable square feet	—	35,000

(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 and two grocery-anchored shopping centers are owned through consolidated joint ventures. One grocery-anchored shopping center is an investment in an unconsolidated 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.
(4) Seven of our office properties and the real estate loan investment supporting the 8West office building were sold during the third quarter 2021.

The COVID-19 pandemic that spread throughout the country during 2020 impacted earnings for commercial real estate to some degree but has not had a profound widespread negative effect on the valuations of real estate assets. The Company is continuing to monitor the spread and impact of the variants of COVID-19 as well as vaccination rates in its markets. The Company does not consider this event to be a triggering event for purposes of impairment, since overall occupancy rates for the Company’s real estate assets have not materially declined and the Company has continued to collect substantially all rent due. Thus, there is no evidence of declining valuations or a triggering event.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

Residential Properties Acquired

During the nine-month periods ended September 30, 2021 and 2020, the Company completed the acquisition of the following multifamily communities:

Acquisition date

Property

Location

Units

2021:

6/30/2021

The Ellison

Atlanta, Georgia

250

7/8/2021

Alleia at Presidio

Ft. Worth, Texas

231

9/14/2021

The Anson

Nashville, Tennessee

301

9/16/2021

The Kingson

Fredericksburg, Virginia

240

9/17/2021

Chestnut Farm

Charlotte, North Carolina

256

1,278

2020:

3/31/2020

Horizon at Wiregrass

Tampa, Florida

392

4/30/2020

Parkside at the Beach

Panama City Beach, Florida

288

680

The aggregate purchase price of the multifamily communities acquired during the nine-month period ended September 30, 2021 was approximately $336.1 million, exclusive of acquired escrows, security deposits, prepaid assets, capitalized acquisition costs and other miscellaneous assets and assumed liabilities. The Company allocated the purchase price and capitalized acquisition costs of the properties acquired during the nine-month period ended September 30, 2021 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.


(In thousands, except amortization period data)	Multifamily communities acquired during the nine-month period ended September 30, 2021

Land	$	27,639
Buildings and improvements	250,833
Furniture, fixtures and equipment	51,628
Lease intangibles	6,989
Prepaids & other assets	372
Accrued taxes	(1,464)
Security deposits, prepaid rents, and other liabilities	(831)

Net assets acquired	$	335,166

Cash paid	$	89,335
Mortgage debt, net	245,831

Total consideration	$	335,166

Capitalized acquisition costs incurred by the Company	$	1,018
Remaining amortization period of intangible
assets and liabilities (months)	9.6

The aggregate purchase price of the multifamily communities acquired during the nine-month period ended September 30, 2020 was approximately $141.2 million, exclusive of acquired escrows, security deposits, prepaid assets, capitalized acquisition costs and other miscellaneous assets and assumed liabilities.

Multifamily community sold

On July 19, 2021, the Company closed on the sale of its 369-unit multifamily community in Houston, Texas, or Vineyards, to an unrelated third party for a sales price of approximately $62.0 million, exclusive of closing costs and resulting in a gain of

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

approximately $20.0 million, net of disposition costs and is included in the line entitled Gain on sale of real estate, net on the Company's Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2021. Vineyards was a component of the Company's Residential Properties segment and contributed approximately $0.3 million of net loss to the consolidated operating results of the Company for the nine-month period ended September 30, 2021.

The carrying amounts of the significant assets and liabilities of the disposed property at the date of sale were:


(In thousands)	Vineyards
Real estate assets:
Land	$	5,456
Building and improvements	43,437
Furniture, fixtures and equipment	5,218
Accumulated depreciation	(12,879)

Total assets, net	$	41,232

Liabilities:
Mortgage note payable	$	32,291

The Company had no sales of multifamily community assets during the nine-month period ended September 30, 2020.

New Market Properties Assets Acquired

The Company acquired no grocery-anchored shopping centers during the nine-month period ended September 30, 2021. During the nine-month period ended September 30, 2020, the Company completed the acquisition of the following grocery-anchored shopping centers:

Acquisition date

Property

Location

Gross leasable area (square feet)

1/29/2020

Wakefield Crossing

Raleigh, North Carolina

75,927

3/19/2020

Midway Market

Dallas, Texas

85,599

161,526

The aggregate purchase price of the New Market Properties acquisitions for the nine-month period ended September 30, 2020 was approximately $27.7 million, exclusive of acquired escrows, security deposits, prepaid assets, capitalized acquisition costs and other miscellaneous assets and assumed liabilities.

The Company recorded aggregate amortization and depreciation expense of:


(In thousands)	Three-month periods ended September 30,				Nine-month periods ended September 30,
	2021		2020		2021		2020
Depreciation:
Buildings and improvements	$	22,988	$	29,050	$	76,348	$	85,811
Furniture, fixtures, and equipment	10,168		12,817		30,391		38,132
	33,156		41,867		106,739		123,943
Amortization:
Acquired intangible assets	6,073		9,510		22,023		27,873
Deferred leasing costs	368		368		1,310		1,132
Website development costs	42		49		126		148
Total depreciation and amortization	$	39,639	$	51,794	$	130,198	$	153,096

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

At September 30, 2021, the Company had recorded acquired gross intangible assets of $232.1 million, accumulated amortization of $164.2 million, gross intangible liabilities of $72.6 million and accumulated amortization of $35.5 million. Net intangible assets and liabilities as of September 30, 2021 will be amortized over the weighted average remaining amortization periods of approximately 6.3 and 8.3 years, respectively.

At September 30, 2021, the Company held restricted cash that totaled approximately $54.0 million. Of this total, $12.2 million was contractually restricted to fund capital expenditures and other property-level commitments such as tenant improvements and leasing commissions. Another $35.6 million was for lender-required escrows for real estate taxes, insurance premiums and COVID-19 reserves. The remainder of the Company's restricted cash consisted primarily of resident and tenant security deposits.

Preferred Office Properties Sold

During the three-month period ended September 30, 2021, the Company closed on the sale of the following office buildings:

Date

Property

Location

7/29/2021

Galleria 75

Atlanta, Georgia

7/29/2021

150 Fayetteville

Raleigh, North Carolina

7/29/2021

Capitol Towers

Charlotte, North Carolina

7/29/2021

CAPTRUST Tower

Raleigh, North Carolina

7/29/2021

Morrocroft Centre

Charlotte, North Carolina

9/8/2021

Armour Yards Portfolio

Atlanta, Georgia

The aggregate sales price of the disposed office properties was approximately $725.0 million and resulted in a loss on sale of approximately $12.0 million, net of disposition costs and is included in the line entitled Gain on sale of real estate, net on the Company's Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2021. The disposal group was a component of the Company's Preferred Office Properties segment and contributed approximately $1.6 million of net income to the consolidated operating results of the Company for the nine-month period ended September 30, 2021. The carrying amounts of the significant assets and liabilities of the disposed properties at the dates of sale were:


(In thousands)	Preferred Office Properties' assets sold during the nine-month period ended September 30, 2021
Real estate assets:
Land	$	74,084
Building and improvements	622,163
Furniture, fixtures and equipment	83
Intangible assets	64,445
Accumulated depreciation	(72,764)

Total assets, net	$	688,011

Liabilities:
Mortgage notes payable	$	436,714

The Company had no sales of Preferred Office Properties' assets during the nine-month period ended September 30, 2020.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

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, in certain cases 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.

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. The Company recorded approximately $2.6 million and $0.4 million of interest revenue from the amortization of these purchase option terminations for the three-month periods ended September 30, 2021 and 2020, respectively and $7.1 million and $4.9 million for the nine-month periods ended September 30, 2021 and 2020, respectively.

Joint Venture Investment

On July 15, 2020, the Company contributed its Neapolitan Way grocery-anchored shopping center that was previously wholly-owned and consolidated into a joint venture in exchange for approximately $19.2 million and 50% interest in the joint venture. In doing so, the Company realized a gain on the transaction of approximately $3.3 million and now holds its remaining interest in the property via an unconsolidated joint venture and retains a 50% voting and financial interest. The following tables summarize the balance sheet and statements of income data for the Neapolitan Way shopping center subsequent to its contribution into the joint venture as of and for the periods presented:


(in thousands)	September 30, 2021		December 31, 2020
Total assets	$	37,362	$	39,109
Total liabilities	$	25,160	$	25,795


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

Rental and other property revenues	$	820	$	651	$	2,456	$	651
Total operating expenses	$	962	$	797	$	2,875	$	797
Interest expense	$	232	$	94	$	693	$	94
Net income (loss)	$	(374)	$	(240)	$	(1,112)	$	(240)
Net income (loss) attributable to the Company	$	(187)	$	(120)	$	(556)	$	(120)

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

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

The Company's portfolio of fixed rate, interest-only real estate loans consisted of:


	September 30, 2021			December 31, 2020
Number of loans	10			20
Number of underlying properties in development	8			14
(In thousands)
Drawn amount	$	190,973		$	290,156
Deferred loan origination fees	(1,773)			(1,194)
Allowance for expected credit losses	(7,577)			(9,067)
Carrying value	$	181,623		$	279,895

Unfunded loan commitments	$	52,467		$	44,403
Weighted average current interest, per annum (paid monthly)	8.50		%	8.50		%
Weighted average accrued interest, per annum	3.59		%	3.91		%


(In thousands)	Principal balance		Deferred loan origination fees		Allowances and CECL Reserves		Carrying value
Balances as of December 31, 2020	$	290,156	$	(1,194)	$	(9,067)	$	279,895
Loan fundings	46,522		—		—		46,522
Loan repayments	(132,970)		—		—		(132,970)
Loans and accrued interest settled through sale	(12,735)		—		202		$	(12,533)
Loan origination fees collected	—		(1,887)		—		(1,887)
Amortization of loan origination fees	—		1,308		—		1,308
Reserve increases due to loan originations	—		—		(954)		(954)
Net decreases in reserves on existing or loans repaid	—		—		2,242		2,242

Balances as of September 30, 2021	$	190,973	$	(1,773)	$	(7,577)	$	181,623


Property type	Number of loans	Carrying value		Commitment amount
(In thousands)

Residential properties	10	$	181,623	$	243,439

The tables above reflect the disposition on July 29, 2021 of the Company's 8West real estate loan investment supporting a class-A office building in Atlanta, Georgia.

On March 1, 2021, we closed on a real estate loan investment of up to approximately $16.8 million to partially finance the development and construction of a 320-unit multifamily community to be located in Orlando, Florida. The loan pays a current monthly interest rate of 8.5% per annum and accrues additional deferred interest of 4.5% per annum and matures on September 1, 2024.

On May 28, 2021, we closed on two real estate loan investments of up to approximately $17.1 million to partially finance the development and construction of a 316-unit multifamily community to be located near Savannah, Georgia. The loans pay a current monthly interest rate of 8.5% per annum and accrue additional deferred interest of 4.25% per annum and mature on May 27, 2025.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

On August 11, 2021, we closed on a real estate loan investment of up to approximately $23.2 million to partially finance the development and construction of a 352-unit multifamily community to be located in the Atlanta, Georgia MSA. The loan pays a current monthly interest rate of 8.5% per annum and accrues additional deferred interest of 4.5% per annum (that will be reduced to 2.5% upon the achievement of certain project milestones) and matures on February 11, 2025.

The Company's real estate loan investments are primarily 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.

The Company's allowance for expected credit losses includes allowances on interest receivable on certain instruments, as shown in the following table:


	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2021		2020		2021		2020
Allowance for expected credit losses:
Haven Campus Communities, LLC line of credit	$	414	$	414	$	1,230	$	1,234
Starkville real estate loan	—		195		—		582
Net (decreases) increases in current expected loss reserves on new and existing loans	(149)		(761)		(1,288)		3,647

Total	$	265	$	(152)	$	(58)	$	5,463

The Company incurred an aggregate net increase in its allowance for expected credit losses of approximately $0.3 million and an aggregate net decrease of $0.2 million for the three-month periods ended September 30, 2021 and 2020, respectively. In the nine-month period ended September 30, 2020, $4.5 million of the $5.5 million aggregate increase in the Company’s allowance for expected credit losses was due to the onset of the COVID-19 pandemic and the Company updating its estimates to the valuations of the underlying developments. The Company does not anticipate such a large increase in future periods.

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 (including unpaid interest) by final reserve ratio as of September 30, 2021:


Final reserve ratio	Number of loans	Total receivables by project, net of reserves (in thousands)
< 1.00%	3	$	18,170
1.00% - 1.99%	6	38,930
2.00% - 2.99%	—	—
3.00% - 3.99%	—	—
4.00% - 4.99%	1	142,204
5.00% +	—	—

	10	$	199,304

The Company continues to monitor the extent of any impact the COVID-19 pandemic has on 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 assesses its real estate loan investment portfolio for impacts from

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

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 Company's portfolio of notes and lines of credit receivable consisted of:


(In thousands) Borrower	Date of loan	Maturity date	Total loan commitments		Outstanding balance as of:				Interest rate
					September 30, 2021		December 31, 2020

Haven Campus Communities, LLC (1)	6/11/2014	12/31/2018	$	11,660	$	9,011	$	9,011	8	%
Oxford Capital Partners, LLC (2,4)	10/5/2015	3/15/2022	1,250		—		1,256		10	%
Oxford Capital Partners II, LLC (2,4)	3/30/2021	3/15/2022	5,300		—		—		10	%
Mulberry Development Group, LLC (3)	3/31/2016	6/30/2022	500		—		607		12	%
Unamortized loan fees					—		—

			$	18,710	$	9,011	$	10,874

(1) 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. See related party disclosure in Note 6.
(2) 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.
(3) The amounts payable under the terms of these revolving credit lines are collateralized by a personal guaranty of repayment by the principal of the borrower.
(4) The commitment was reduced from $8 million to $1.25 million for the Oxford Capital Partners, LLC line of credit on March 30, 2021. A second Oxford line of credit was opened on March 30, 2021 with a commitment of $5.3 million.

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, 2021 was approximately $2.7 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. 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 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.

Additionally, in November 2020, the Company filed 2 lawsuits to collect past due rent owed to the Former Manager of the Company, as sub-landlord pursuant to (i) an office sublease agreement dated May 1, 2017 by and between the Former Manager and Elevation Development Group, LLC and (ii) an office sublease agreement dated October 1, 2014 by and among the Former Manager, as sub-landlord, and Haven Campus Communities, LLC and Madison Retail, LLC as sub-tenants. The Company retains partial personal guaranties of repayment from the principals of Haven Campus Communities, LLC and Madison Retail, LLC. In December 2020, the defendants answered the lawsuit and filed counterclaims against the Company and its affiliates. At this time, the case is in discovery, so the Company is unable to make any estimates on timing or amounts that may be collected by the Company on its subleases.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

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


(In thousands) Interest income	Three-month periods ended September 30,				Nine-month periods ended September 30,
	2021		2020		2021		2020
Real estate loans:
Current interest	$	5,516	$	6,921	$	18,055	$	21,070
Accrued interest	2,374		3,052		7,958		9,208
Loan origination fee amortization	666		264		1,308		791
Purchase option termination fee amortization	2,634		421		7,074		4,896
Default interest	—		63		—		186

Total real estate loan revenue	11,190		10,721		34,395		36,151
Notes and lines of credit	464		536		1,400		2,056
Bank and money market accounts	2		1		2		38


Interest income on loans and notes receivable	$	11,656	$	11,258	$	35,797	$	38,245

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 standard 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, 2021 of approximately $191.0 million. The maximum aggregate amount of loans to be funded as of September 30, 2021 was approximately $243.4 million, which includes approximately $52.5 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 in cases where (i) the majority of the expected residual profit is expected to be due to the developer and (ii) the majority of "loan versus investment" tests indicate that the instrument is a loan.

The Company is subject to a geographic concentration of risk that could be considered significant with regard to the Solis Cumming Town Center, Populus at Pooler, Populus at Pooler Capital and Club Drive real estate loan investments, all of which are partially supporting various real estate projects in Georgia. The drawn amount, plus outstanding accrued interest, for these loans as of September 30, 2021 totaled approximately $23.2 million (with a total commitment amount of approximately $60.9 million). The Company is also subject to a geographic concentration of risk that could be considered significant with regard to the Hidden River II, Hidden River II Capital, Vintage Horizon West and The Hudson real estate loan investments, all of which are partially supporting various real estate projects in Florida. The drawn amount, plus outstanding accrued interest, for these loans as of September 30, 2021 totaled approximately $26.0 million (with a total commitment amount of approximately

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

$34.9 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 and all outstanding accrued interest.

5. Redeemable Preferred Stock and Equity Offerings

On February 14, 2020, the Company's 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 until June 3, 2021, in conjunction with the Company's winding down of the $1.5 Billion Unit Offering.

The Series A Preferred Stock, Series A1 Preferred Stock, mShares, and Series M1 Preferred Stock are collectively defined as “Preferred Stock”.

During the three-month period ended September 30, 2021, the Company called or redeemed an aggregate of 35,802 shares of Redeemable Preferred Stock for a total redemption cost of $305.8 million.

At September 30, 2021, the Company's active equity offerings consisted of:

•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"); and

•an offering of up to $125 million of Common Stock from time to time in an "at the market" offering (the "2019 ATM Offering") under our $400 million shelf registration statement (the "2019 Shelf Registration Statement") on Form S-3 that was filed with the SEC on March 21, 2019.

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 shares of Preferred Stock anticipated to be issued. Any offering costs not yet reclassified as reductions of stockholders' equity are reflected in the asset section of the consolidated balance sheets as deferred offering costs.

Cumulative gross proceeds and offering costs for the Company's active equity offerings consisted of:


(In thousands)					Deferred Offering Costs
Offering	Total offering		Gross proceeds as of September 30, 2021		Reclassified as reductions of stockholders' equity		Recorded as deferred assets		Total		Specifically identifiable offering costs (1)		Total offering costs

Series A1/M1 Offering	$	1,000,000	$	281,005	$	5,024	$	2,127	$	7,151	$	26,507	$	33,658
2019 ATM Offering	125,000		32,589		227		1,074		1,301		512		1,813


Total	$	1,125,000	$	313,594	$	5,251	$	3,201	$	8,452	$	27,019	$	35,471

(1) These offering costs specifically identifiable to preferred stock or ATM 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.

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

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

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.

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 capped at 12.0% of aggregate gross proceeds of the offering. Dealer manager fees and sales commissions for the Series A1/M1 Preferred Stock Offering are not reimbursable.

2019 ATM Offering

During the nine-month period ended September 30, 2021, the Company issued and sold 2,609,840 shares of Common Stock under the 2019 ATM Offering, generating gross proceeds of approximately $28.0 million and, after deducting commissions and other costs, net proceeds of approximately $27.6 million.

6. Related Party Transactions

On January 31, 2020, the Company internalized the functions performed by the Former Manager and 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 Carveout 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.

Daniel M. DuPree and Leonard A. Silverstein were executive directors of NELL Partners, Inc., which controlled the 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, 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 current Chairman of the Board, the family of Mr. Williams, Mr. DuPree and the family of Mr. Silverstein were the owners of the Sub-Manager.

The Company's Haven Campus Communities LLC line of credit is supported in part by a guaranty of repayment and performance by John A. Williams, Jr., the son of the late John A. 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's Wiregrass and Wiregrass Capital real estate loan investments partially 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 (Unaudited)

September 30, 2021

The Management Agreement entitled the Former Manager to receive compensation for various services it performed related to acquiring assets and managing properties on the Company's behalf, as shown in the following table. There were no such fees incurred during the nine-month period ended September 30, 2021.


Type of Compensation	Basis of Compensation	Three-month period ended September 30, 2020 (in thousands)		Nine-month period ended September 30, 2020 (in thousands)

Acquisition fees	1.0% of the gross purchase price of real estate assets	$	—	$	235
Loan coordination fees	0.6% of any assumed, new or supplemental debt incurred in connection with an acquired property	—		47
Asset management fees	Monthly fee equal to one-twelfth of 0.50% of the total book value of assets, as adjusted	—		1,349
Property management fees	Monthly fee up to 4% of the monthly gross revenues of the properties managed	—		890
General and administrative expense fees	Monthly fee equal to 2% of the monthly gross revenues of the Company	—		616
Construction management fees	Quarterly fee for property renovation and takeover projects	—		14

		$	—	$	3,151

The Former Manager waived some of the asset management, property management, or general and administrative fees for properties owned by the Company. A cumulative total of approximately $25.6 million of combined asset management and general and administrative fees related to acquired properties had been waived by the Former Manager; at the date of Internalization, all of the remaining contingent fees of $24.1 million were eliminated in conjunction with the Company's Internalization transaction.

In addition to property management fees, the Company incurred reimbursable on-site personnel salary and related benefits expenses at the properties that totaled $0 and $1.43 million for the three-month and nine-month periods ended September 30, 2020, respectively. These costs are listed on the Company's Consolidated Statements of Operations.

The Former Manager 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 $0 and $40,451 for the three-month and nine-month periods ended September 30, 2020 respectively. These costs were recorded as deferred offering costs until such time as additional closings occur on the Series A1/M1 Preferred Stock 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 engaged PCS, an affiliate of the Company until June 3, 2021, to perform certain termination-related services. These services began in October 2019 and continued through April 2020. The Company paid an additional $3.1 million for these services for the nine-month period ended September 30, 2020, which were recorded as deferred offering costs.

Prior to the Internalization, the Company held a promissory note in the amount of approximately $650,000 due from Preferred Capital Marketing Services, LLC, or PCMS, which was a wholly-owned subsidiary of NELL Partners, and a revolving line of credit with a maximum borrowing amount of $24.0 million to its Manager. Both of these instruments were extinguished in connection with the Internalization transaction.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

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 and its Series A1 Preferred Stock. For the Company's Series M Preferred Stock, or mShares, dividends 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. Similarly, for the Company's Series M1 Preferred Stock, dividends are paid on an escalating scale of $5.08 per month in the first year 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 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 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.

The Company declared aggregate quarterly cash dividends on its Common Stock of $0.175 and $0.175 per share for the three-month periods ended September 30, 2021 and 2020, respectively and $0.525 and $0.6125 per share for the nine-month periods ended September 30, 2021 and 2020, 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, 2021, the Company had 496,269 Class A OP Units outstanding, which are exchangeable on a one-for-one basis for shares of Common Stock or the equivalent amount of cash.

The Company's dividend and distribution activity consisted of:


	Dividends and distributions declared
	For the three-month periods ended September 30,				For the nine-month periods ended September 30,
(In thousands)	2021		2020		2021		2020

Series A Preferred Stock	$	52,330	$	32,964	$	110,786	$	97,272
mShares	1,425		1,547		4,362		4,903
Series A1 Preferred Stock	3,622		1,241		9,283		2,209
Series M1 Preferred Stock	478		157		1,221		217
PAC Carveout REIT Preferred Stock	4		—		10		—
Common Stock and Restricted Stock	9,432		8,876		27,682		29,991
Class A OP Units	87		130		270		463

Total	$	67,378	$	44,915	$	153,614	$	135,055

Included in the table above are deemed dividends resulting from calls of the Company's Series A Preferred Stock that totaled approximately $28.8 million and $31.1 million for the three-month and nine-month periods ended September 30, 2021, respectively.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

8. Equity Compensation

Stock Incentive Plan

On May 2, 2019, the Company’s board of directors adopted, and the holders of the Company’s Common Stock 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. On June 3, 2021, the holders of the Company's Common Stock approved an amendment to the 2019 Plan that increased the available shares of Common Stock available for issuance from 3,617,500 to 5,517,500. The 2019 Plan does not have a stated expiration date.

Equity compensation expense by award type for the Company was:


(In thousands)	Three-month periods ended September 30,				Nine-month periods ended September 30,				Unamortized expense as of September 30, 2021
	2021		2020		2021		2020

Class B Unit awards to employees:
2017	$	—	$	—	$	—	$	3	$	—
2018	39		70		—		191		—
Restricted stock grants to Board members:
2019	—		—		—		140		—
2020	—		133		177		222		—
2021	120		—		160		—		320
Restricted stock grants for employees:
2020	166		242		652		279		2,469
2021	145		—		349		—		2,228
Performance-based restricted stock units:
2020	94		92		370		92		1,120
2021	214		—		499		—		2,463
Restricted stock units to employees:
2018	—		14		(2)		38		—
2019	16		16		45		47		17
2020	7		15		30		46		62
2021	16		—		36		—		165

Total	$	817	$	582	$	2,316	$	1,058	$	8,844

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

Performance-based Restricted Stock Unit Grants

On March 15, 2021 and July 31, 2020, the Company awarded performance-based restricted stock units (“PSUs”) to certain of its senior executives. Each PSU represents the right to receive one share of Common Stock upon satisfaction of both (i) the market condition, at which time the PSUs become earned PSUs, and (ii) the service requirement, beyond which point the PSUs become vested PSUs.

The market condition requirement of the PSUs consists of a relative measure of total shareholder return (“TSR”) of the Company's Common Stock versus the average TSR of a select group of publicly-traded peer companies. TSR is calculated by dividing the sum of price appreciation and cumulative dividends over the performance period divided by the beginning value of the Common Stock at the performance period commencement date (July 1, 2020 for the 2020 awards and January 1, 2021 for the 2021 awards), where the determining values are derived by calculating the 20-day volume weighted average stock price preceding both the performance period commencement date and the performance period end date (June 30, 2023 for the 2020 awards and December 31, 2023 for the 2021 awards). PSUs will become earned PSUs according to the percentile rank of the TSR of Company's Common Stock versus the peer group’s average TSR, as shown in the following table:


Level	Relative TSR performance (percentile rank versus peers)	Earned PSUs (% of target)
< Threshold	<35th Percentile	0%
Threshold	35th Percentile	50%
Target	55th Percentile	100%
Maximum	>=75th Percentile	200%

The number of PSUs that become earned PSUs can range between 0% and 200% of the original (target) number of PSUs awarded for the 2020 awards and between 0% and 250% of the original (target) number of PSUs for the 2021 awards, and actual percentile ranking results between the 35th and 75th percentile are to be interpolated between the percentage earned values shown.

In order for earned PSUs to become vested PSUs, the participant must remain continuously employed by the Company or an affiliate company (i) from the grant date through the payout determination date (expected to be no more than 5 days following the performance period end date) for 50% of the PSU award and (ii) from the grant date through the first anniversary of the performance period end date for the remaining 50% of the PSU award.

Since the PSUs vest in part based upon achievement of a market condition, they were valued utilizing a Monte-Carlo simulation that excludes the value of Common Stock dividends since dividend equivalents accrue separately to the award holders. The underlying valuation assumptions and results for the PSUs were:


Grant date	3/15/2021			7/31/2020

Stock price on grant date	$	10.86		$	7.23
Dividend yield	7.19		%	6.87		%
Expected volatility	49.81		%	44.40		%
Risk-free interest rate	0.29		%	0.11		%

Target number of PSUs granted:
First vesting tranche	103,511			136,462
Second vesting tranche	103,517			136,467
	207,028			272,929

Calculated fair value per PSU	$	15.24		$	6.76

Total fair value of PSUs	$	3,155,107		$	1,845,000

A total of 12,639 and 18,491 PSUs from the 2021 and 2020 grants, respectively, were forfeited during the third quarter 2021.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

The expected dividend yield assumptions were derived from the Company’s closing prices of the Common Stock and historical dividend amounts over the trailing five-year period from the grant date.

The Company's own stock price history over the 2.80 year and 2.91 year periods trailing the grant dates was utilized as the expected volatility assumptions for the 2021 and 2020 awards, respectively.

The risk-free rate assumptions were obtained from the grant date yields on zero coupon U.S. Treasury STRIPS that have a term equal to the length of the remaining Performance Period and were calculated as the interpolated rate between the two-year and three-year yield percentages.

Restricted Stock Grants

The following annual grants of restricted stock were made to the Company's independent directors, as payment of the annual retainer fees. The restricted stock grants for service years 2019-2021 vested on a pro-rata basis over the four consecutive 90-day periods following the date of grant. The restricted stock grants for service years 2020 and 2021 vested (or are scheduled to vest) on the earlier of the one-year anniversary of the date of grant and the next annual meeting of stockholders..


Service year	Shares	Fair value per share		Total compensation cost (in thousands)
2019	26,446	$	15.88	$	420
2020	66,114	$	8.05	$	532
2021	46,782	$	10.26	$	480

On June 17, 2020, the Company granted restricted stock to certain of its executives and employees. The fair value per share of $8.05 was based upon the closing price of the Company's Common Stock on the business day preceding the grant date. A total of 137,741 shares representing a fair value of approximately $1.1 million will vest on the four year anniversary of the grant date and 344,356 shares representing a fair value of approximately $2.8 million are scheduled to vest on a pro-rata basis on each of the four succeeding anniversaries of the grant date. A total of 22,210 shares of unvested restricted stock was forfeited from the 2020 grant during the third quarter of 2021.

On March 15, 2021, the Company granted restricted stock to certain of its executives and employees. The fair value per share of $10.69 was based upon the closing price of the Company's Common Stock on the grant date. A total of 261,226 shares representing a fair value of approximately $2.8 million are scheduled to vest on a pro-rata basis on each of the four succeeding anniversaries of the grant date. A total of 20,112 shares of unvested restricted stock was forfeited from the 2021 grant during the third quarter of 2021.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

Class B OP Units

As of September 30, 2021, cumulative activity of grants of Class B Units of the Operating Partnership, or Class B OP Units, was:


						Grant date
						1/2/2018

Units granted						256,087
Units forfeited:
John A. Williams (1)						(38,284)
Voluntary forfeiture by senior executives (2)						(128,258)
Other						(31,079)

Total forfeitures						(197,621)

Units earned and converted into Class A Units						—

Class B Units outstanding at September 30, 2021						58,466

Units unearned but vested						58,466
Units unearned and not yet vested						—

Class B Units outstanding at September 30, 2021						58,466

(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.

There were no grants of Class B OP Units subsequent to January 2, 2018.

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


Grant date	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.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

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.

Restricted Stock Units

The Company 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	3/15/2021		1/2/2020		1/2/2019		1/2/2018
Service period	2021-2023		2020-2022		2019-2021		2018-2020

RSU activity:
Granted	20,600		21,400		27,760		20,720
Forfeited	(1,800)		(5,600)		(8,661)		(8,274)

RSUs outstanding at September 30, 2021	18,800		15,800		19,099		12,446

RSUs unearned but vested	—		5,288		12,817		12,446
RSUs unearned and not yet vested	18,800		10,512		6,282		—

RSUs outstanding at September 30, 2021	18,800		15,800		19,099		12,446

Fair value per RSU	$	10.69	$	9.47	$	10.77	$	16.66
Total fair value of RSU grant	$	220,214	$	202,658	$	298,975	$	345,195

The RSUs vest in three equal consecutive one-year tranches from the date of grant. For each grant prior to March 15, 2021, on the Initial Valuation Date, the market capitalization of the number of shares of Common Stock at the date of grant is compared to the market capitalization of the same number of shares of Common Stock at the Initial Valuation Date. If the market capitalization measure results in an increase which exceeds the target market threshold, the Vested RSUs become earned RSUs and 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. RSUs issued on March 15, 2021 may become vested subject only to satisfaction of the service requirement.

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 (Unaudited)

September 30, 2021

9. Indebtedness

Mortgage Notes Payable

Mortgage financing of property acquisitions

During the nine-month periods ended September 30, 2021 and 2020, the Company obtained original mortgage financing on the following properties as shown in the following table:

Property

Date

Initial principal amount
(in thousands)

Fixed/Variable rate

Interest rate

Maturity date

2021:

Midway Market (1)

4/15/2021

10,150

Fixed

3.06

5/1/2031

The Ellison

6/30/2021

48,000

Variable

L + 150

3/31/2022

Alleia at Presidio

7/8/2021

35,700

Fixed

2.50

8/1/2026

The Anson

9/14/2021

56,440

Fixed

2.69

10/1/2031

The Kingson

9/16/2021

53,900

Fixed

2.35

10/1/2026

Chestnut Farm

9/17/2021

51,800

Variable

L + 150

6/17/2022

Citi Lakes B-Note

9/24/2021

10,420

Fixed

3.85

8/1/2029

266,410

2020:

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

Horizon at Wiregrass Ranch

4/23/2020

52,000

Fixed

2.90

5/1/2030

Parkside at the Beach

4/30/2020

45,037

Fixed

2.95

5/1/2030

178,450

(1) Midway Market Shopping Center was acquired on March 19, 2020 and the mortgage financing was obtained on the property on April 15, 2021.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

Repayments and refinancings

The following table summarizes our mortgage debt refinancing and repayment activity for the nine-month periods ended September 30, 2021 and 2020:


Date	Property	Previous balance (millions)		Previous interest rate / spread over 1 month LIBOR		Loan refinancing costs expensed (thousands)		New balance (millions)		New interest rate		Additional deferred loan costs from refinancing (thousands)

2021:
2/28/2021	Village at Baldwin Park	$	69.4	3.59	%	$	6	$	69.4	3.27	%	$	923
7/19/2021	Vineyards	32.3		3.68	%	1		—		—		—
7/29/2021	Galleria 75	5.0		4.25	%	166		—		—		—
7/29/2021	150 Fayetteville	112.6		4.27	%	—		—		—		—
7/29/2021	Capitol Towers	121.5		4.60	%	—		—		—		—
7/29/2021	CAPTRUST Tower	82.7		3.61	%	—		—		—		—
7/29/2021	Morrocroft Centre	70.0		3.40	%	—		—		—		—
8/18/2021	The Ellison	48.0		L + 150		96		48.0		2.52	%	400
9/8/2021	Armour Yards	38.9		4.10	%	424		—		—		—
9/8/2021	251 Armour Yards	6.1		4.50	%	—		—		—		—
8/30/2021	Woodstock Crossing	2.8		4.71	%	—		—		—		—
9/24/2021	Sorrel	30.2		3.44	%	232		47.7		2.54	%	1,787

		$	619.5			$	925	$	165.1			$	3,110

2020:
1/3/2020	Ursa	$	31.4	L + 300		$	—	$	—	—		$	—
6/25/2020	CityPark View	19.8		3.27	%	1,314		29.0		2.75%		314
6/29/2020	Aster at Lely Resort	30.7		3.84	%	293		50.4		2.95%		2,777
6/29/2020	Avenues at Northpointe	26.0		3.16	%	166		33.5		2.79%		1,247
6/30/2020	Avenues at Cypress	20.5		3.43	%	1,607		28.4		2.96%		336
6/30/2020	Venue at Lakewood Ranch	27.8		3.55	%	2,457		36.6		2.99%		384
6/30/2020	Crosstown Walk	29.9		3.90	%	248		46.5		2.92%		2,841
6/30/2020	Summit Crossing II	13.1		4.49	%	779		20.7		L + 278		136
7/10/2020	Citrus Village	28.5		3.65	%	704		40.9		2.95%		522
7/31/2020	Village at Baldwin Park	70.1		4.16	%	16		70.1		3.59%		864

		$	297.8			$	7,584	$	356.1			$	9,421

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

The following table summarizes our mortgage notes payable at September 30, 2021:


(In thousands)
Fixed rate mortgage debt:	Principal balances due		Weighted-average interest rate		Weighted average remaining life (years)
Residential Properties	$	1,547,348	3.39	%	8.4
New Market Properties	564,040		3.98	%	6.6
Preferred Office Properties	194,183		4.23	%	15.4

Total fixed rate mortgage debt	$	2,305,571	3.60	%	8.6

Variable rate mortgage debt:
Residential Properties	$	72,500	1.95	%	3.0
New Market Properties	47,150		2.79	%	2.1
Preferred Office Properties	—		—	%	0.0

Total variable rate mortgage debt	$	119,650	2.28	%	2.7

Total mortgage debt:
Residential Properties	$	1,619,848	3.32	%	8.2
New Market Properties	611,190		3.89	%	6.3
Preferred Office Properties	194,183		4.23	%	15.4

Total principal amount	2,425,221		3.54	%	8.3
Deferred loan costs	(36,720)
Mark to market loan adjustment	(3,918)
Mortgage notes payable, net	$	2,384,583

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, 2021, the weighted-average remaining life of deferred loan costs related to the Company's mortgage indebtedness was approximately 8.8 years. Our mortgage notes have maturity dates between June 17, 2022 and June 1, 2054.

Credit Facility

The Company has a credit facility, or Credit Facility, with KeyBank National Association, or KeyBank, which 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. The maximum borrowing capacity on the Revolving Line of Credit is $200 million with an option to increase to $300 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 May 4, 2021, the Fourth Amended and Restated Credit Agreement, or the Amended and Restated Credit Agreement, was amended to extend the maturity to May 4, 2024, with an option to extend the maturity date to May 4, 2025, 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 2.50% to 3.50% per annum, depending upon the Company’s leverage ratio. The weighted average interest rate for the Revolving Line of Credit was 3.62% for the nine-month period ended September 30, 2021. The commitment fee on the average daily unused portion of the Revolving Line of Credit is 0.20% or 0.25% per annum, depending upon the Company's outstanding Credit Facility balance.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

On December 20, 2019, the Company entered into a $70.0 million interim term loan with KeyBank, or the 2019 Term Loan, to partially finance the acquisition of Morrocroft Centre, an office building located in Charlotte, North Carolina. The 2019 Term Loan accrued interest at a rate of LIBOR plus 1.7% per annum. The 2019 Term Loan was repaid in conjunction with the closing of permanent mortgage financing for Morrocroft Centre on March 19, 2020.

The Fourth Amended and Restated Credit Agreement, as amended on May 4, 2021, 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 100% 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, 2021, the Company was in compliance with all covenants related to the Revolving Line of Credit, as amended, as shown in the following table:

Covenant (1)

Requirement

Result

Net worth

Minimum $1.3 billion

(2)

$1.7 billion

Debt yield

Minimum 8.75%

(3)

9.68%

Payout ratio

Maximum 100%

(4)

85.3%

Total leverage ratio

Maximum 65%

58.4%

Debt service coverage ratio

Minimum 1.50x

(5)

2.08x

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

(2) The minimum net worth covenant decreased to a minimum of $1.3 billion on July 29, 2021 with the office properties closing.

(3) The minimum debt yield covenant increases to a minimum of 9.0% on May 5, 2023.

(4) Calculated on a trailing four-quarter basis. For the period ended September 30, 2021, the maximum dividends and distributions allowed under this covenant was approximately $183.7 million.

(5) Minimum of 1.50x if AFFO payout ratio is less than or equal to 95% and 1.70x if greater than 95%.

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, 2021, unamortized loan fees and closing costs for the Credit Facility were approximately $2.0 million, which will be amortized over a remaining loan life of approximately 2.7 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. 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 2 one-year extension options, subject to certain conditions described therein.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

Interest Expense

Interest expense, including amortization of deferred loan costs was:


(In thousands)	Three-month periods ended September 30,				Nine-month periods ended September 30,
	2021		2020		2021		2020

Residential Properties	$	14,130	$	15,739	$	40,614	$	46,537
New Market Properties	6,463		6,539		19,397		19,876
Preferred Office Properties	3,710		6,699		17,031		20,256

Total	24,303		28,977		77,042		86,669

Credit Facility and Acquisition Facility	544		902		2,092		3,939
Interest Expense	$	24,847	$	29,879	$	79,134	$	90,608

Future Principal Payments

The Company’s estimated future principal payments due on its debt instruments as of September 30, 2021 were:


Period	Future principal payments (in thousands)
2021	$	36,855
2022	117,045
2023	82,205
2024	290,414
2025	57,492
2026	335,024
2027	317,639
2028	245,105
2029	245,056
2030	356,042
Thereafter	342,344

Total	$	2,425,221

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, 2021 and December 31, 2020.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

11. Commitments and Contingencies

On January 31, 2020, the Company assumed its Former Manager's eleven-year office lease as amended, which began on October 9, 2014. As of September 30, 2021, the amount of rent due from the Company was $12.4 million over the remaining term of the lease.

At September 30, 2021, the Company had unfunded commitments on its real estate loan portfolio of approximately $52.5 million.

At September 30, 2021, the Company had unfunded contractual commitments for tenant, leasing, and capital improvements of approximately $4.1 million.

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, other than as described herein.

12. Operating Leases

Company as Lessor

For the three-month periods ended September 30, 2021 and 2020, the Company recognized rental property revenues of $96.3 million and $111.9 million, respectively, of which $10.3 million and $10.7 million, respectively, represented variable rental revenue. For the nine-month periods ended September 30, 2021 and 2020, the Company recognized rental property revenues of $300.5 million and $330.4 million, respectively, of which $32.1 million and $31.2 million, respectively, represented variable rental revenue.

Company as Lessee

The Company has one ground lease for which the Company has evaluated its renewal option periods in quantifying its related lessee asset and liability. 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 three to five years in duration with minimal rent increases. The Company subleases a portion of its leased office space to third parties; office rental expense is included net of the revenue from these subleases in the general and administrative expense line on the consolidated statements of operations. Revenue from subleased office space was approximately $707,000 and $763,0000 for the nine-month periods ended September 30, 2021 and 2020, respectively.

The Company recorded lease expense as follows:


	Nine-month periods ended September 30,								As of September 30, 2021
(In thousands)	2021				2020				Weighted average remaining lease term (years)	Weighted average discount rate
	Lease expense		Cash paid		Lease expense		Cash paid

Office space	$	2,185	$	2,190	$	1,942	$	1,903	4.3	3.0	%
Ground leases	17		11		44		38		43.3	4.5	%
Office equipment	100		100		282		282		2.7	3.0	%

Total	$	2,302	$	2,301	$	2,268	$	2,223

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

Future minimum rent expense for office space, ground leases and office equipment were:


For the year ending December 31:		Future Minimum Rents as of September 30, 2021
(in thousands)		Office space		Ground leases		Office equipment		Total

2021	(1)	$	740	$	4	$	25	$	769
2022		2,855		15		59		2,929
2023		2,497		15		39		2,551
2024		3,139		15		19		3,173
2025		2,808		17		12		2,837
Thereafter		355		938		—		1,293

Total		$	12,394	$	1,004	$	154	$	13,552

(1) Remaining three 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 4 distinct segments: Residential Properties, real estate related financing, New Market Properties and Preferred Office Properties.

Residential Properties - consists of the Company's portfolio of residential multifamily communities as well as the Company's portfolio of owned student housing properties. Preferred Campus Communities, LLC owned and conducted the business of our portfolio of off-campus student housing communities until the sale of all our student housing communities on November 3, 2020. As of and for the three-month and nine-month periods ended September 30, 2021, the Residential Properties segment only consists of the Company's multifamily communities.

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 the consolidated assets of VIEs.

New Market Properties - consists of the Company's portfolio of grocery-anchored shopping centers.

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

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

The following tables present the Company's assets, revenues, and NOI results by reportable segment, as well as a reconciliation from NOI to net income (loss). The assets attributable to 'Other' primarily consist of right of use assets, 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 (Unaudited)

September 30, 2021


(In thousands)	September 30, 2021		December 31, 2020

Assets:
Residential properties	$	1,988,651	$	1,745,020
Financing	210,324		321,026
New Market Properties	1,040,921		1,072,090
Preferred Office Properties	373,105		1,121,992
Other	46,034		20,951
Consolidated assets	$	3,659,035	$	4,281,079

Total capitalized expenditures (inclusive of additions to construction in progress, but exclusive of the purchase price of acquisitions) were as follows:


(In thousands)	Three-month periods ended September 30,				Nine-month periods ended September 30,
	2021		2020		2021		2020

Capitalized expenditures:
Residential properties	$	3,988	$	4,348	$	10,400	$	10,938
New Market Properties	1,126		2,017		4,706		4,557
Preferred Office Properties	1,191		5,779		5,060		22,458
Total	$	6,305	$	12,144	$	20,166	$	37,953

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

Total revenues by reportable segment of the Company were:


(In thousands)	Three-month periods ended September 30,				Nine-month periods ended September 30,
	2021		2020		2021		2020
Revenues

Rental and other property revenues:
Residential properties	$	55,425	$	60,643	$	157,709	$	180,325
New Market Properties	27,078		26,707		80,921		80,815
Preferred Office Properties (1)	16,799		27,810		70,896		81,009
Total rental and other property revenues	99,302		115,160		309,526		342,149

Financing revenues	11,688		11,271		35,830		38,115
Miscellaneous revenues	22		21		62		50
Consolidated revenues	$	111,012	$	126,452	$	345,418	$	380,314

(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, 2021, the Company has recorded deferred revenue in an aggregate amount of $47.0 million in connection with such improvements. The remaining balance to be recognized is approximately $33.1 million which is included in the deferred revenues line on the consolidated balance sheets at September 30, 2021. 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 for both the nine-month periods ended September 30, 2021 and 2020, respectively.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

The CODM 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.

Segment NOI for each reportable segment was as follows:


	Three-month periods ended September 30,				Nine-month periods ended September 30,
(In thousands)	2021		2020		2021		2020
Segment net operating income (Segment NOI)

Residential Properties	$	32,482	$	32,742	$	91,734	$	102,195
New Market Properties	19,601		19,386		57,361		57,360
Preferred Office Properties	12,076		20,215		51,054		59,230
Financing	11,683		11,245		35,814		38,089
Miscellaneous revenues	22		21		62		50

Consolidated segment net operating income	75,864		83,609		236,025		256,924

Interest expense:
Residential Properties	14,130		15,739		40,614		46,537
New Market Properties	6,463		6,539		19,397		19,876
Preferred Office Properties	3,710		6,699		17,031		20,256
Corporate	544		902		2,092		3,939
Depreciation and amortization:
Residential Properties	22,345		26,462		65,818		77,602
New Market Properties	11,363		12,688		34,749		39,410
Preferred Office Properties	5,877		12,590		29,464		35,941
Corporate	54		54		167		143
Equity compensation to directors and executives	817		582		2,316		1,058
Management fees, net of waived fees	—		—		—		1,963
Management Internalization	242		577		727		179,828
Allowance for expected credit losses	265		(152)		(58)		5,463
(Gain) / loss on sale of real estate	(7,942)		(3,261)		(8,740)		(3,261)
(Gain) / loss on sale of real estate loan investment	12		—		12		—
(Gain) / loss on sale of land	—		(49)		—		(528)
(Gain) / loss on extinguishment of debt	—		518		—		6,674
Loss from unconsolidated joint venture	187		120		556		120
General and Administrative	7,772		7,203		23,007		20,978

Net income (loss)	$	10,025	$	(3,602)	$	8,873	$	(199,075)

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

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:


	(In thousands, except per-share figures)	Three-month periods ended September 30,				Nine-month periods ended September 30,
		2021		2020		2021		2020
Numerator:
	Operating income (loss) before gains on sales of real estate and loss from unconsolidated joint venture	$	27,129	$	23,605	$	79,835	$	(105,462)
	Loss from unconsolidated joint venture	(187)		(120)		(556)		(120)
	Gain on sale of real estate	7,942		3,261		8,740		3,261

	Operating income (loss)	34,884		26,746		88,019		(102,321)
	Interest expense	24,847		29,879		79,134		90,608
	Loss on extinguishment of debt	—		(518)		—		(6,674)
	Gain on sale of land	—		49		—		528
	Loss on sale of real estate loan investment	(12)		—		(12)		—

	Net income (loss)	10,025		(3,602)		8,873		(199,075)
	Net (income) loss attributable to non-controlling interests (A)	(48)		108		11		3,515

	Net income (loss) attributable to the Company	9,977		(3,494)		8,884		(195,560)

	Dividends declared to preferred stockholders (B)	(57,859)		(35,909)		(125,662)		(104,601)
	Net loss attributable to unvested restricted stock (C)	(117)		(96)		(397)		(109)

	Net loss attributable to common stockholders	$	(47,999)	$	(39,499)	$	(117,175)	$	(300,270)

Denominator:
	Weighted average number of shares of Common Stock - basic	52,455		49,689		51,011		48,351

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

	Weighted average number of shares of Common Stock - basic and diluted	52,455		49,689		51,011		48,351

	Net loss per share of Common Stock attributable to
	common stockholders, basic and diluted	$	(0.92)	$	(0.79)	$	(2.30)	$	(6.21)

(A) The Company's outstanding Class A Units of the Operating Partnership (496 and 742 Units at September 30, 2021, and 2020, 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 1,344 and 1,991 outstanding shares of Series A Preferred Stock at September 30, 2021 and 2020, respectively and 246 and 103 outstanding shares of Series A1 Preferred Stock at September 30, 2021 and 2020, respectively. The Company's mShares accrue dividends at an escalating rate of 5.75% in year one to 7.50% in year eight and thereafter. The Company had 84 and 91 mShares outstanding at September 30, 2021 and 2020, 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 thereafter. The Company had 32 and 13 shares of Series M1 Preferred Stock outstanding at September 30, 2021 and 2020, respectively.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

(C) The Company's outstanding unvested restricted share awards (662 and 548 shares of Common Stock at September 30, 2021 and 2020, 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 21,689 shares of Common Stock; (ii) 58 Class B Units; (iii) 662 shares of unvested restricted common stock; (iv) 66 outstanding Restricted Stock Units; and (v) 449 PSUs 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.

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 allowances and are presented net of deferred loan fee revenue and credit losses reserves, where applicable.


	As of September 30, 2021
(In thousands)	Carrying value				Fair value measurements using fair value hierarchy
			Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Real estate loans	$	197,377	$	203,168	$	—	$	—	$	203,168
Notes receivable and line of credit receivable	9,011		9,011		—		—		9,011
	$	206,388	$	212,179	$	—	$	—	$	212,179
Financial Liabilities:
Mortgage notes payable	$	2,425,221	$	2,467,857	$	—	$	—	$	2,467,857
Revolving line of credit	—		—		—		—		—
	$	2,425,221	$	2,467,857	$	—	$	—	$	2,467,857


	As of December 31, 2020
(In thousands)	Carrying value				Fair value measurements using fair value hierarchy
			Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Real estate loans	$	302,423	$	315,074	$	—	$	—	$	315,074
Notes receivable and line of credit receivable	10,874		10,874		—		—		10,874
	$	313,297	$	325,948	$	—	$	—	$	325,948
Financial Liabilities:
Mortgage notes payable	$	2,640,705	$	2,666,471	$	—	$	—	$	2,666,471
Revolving line of credit	22,000		22,000		—		—		22,000
	$	2,662,705	$	2,688,471	$	—	$	—	$	2,688,471

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2021

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, based on the outstanding loan balances at September 30, 2021 and December 31, 2020, discounted to the reporting date utilizing a discount rate believed to be appropriate for multifamily development projects.

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

16. Subsequent Events

On October 14, 2021, the Company closed on a real estate loan investment of up to $16.6 million supporting a 337-unit second phase of The Menlo multifamily community in Jacksonville, Florida.

On October 21, 2021, the Company closed on supplemental notes payable (i) with a principal amount of approximately $7.3 million supporting the Retreat at Greystone multifamily community that bears a fixed interest rate of 3.47% per annum and matures on December 1, 2024 and (ii) with a principal amount of approximately $3.7 million supporting the Aldridge at Town Village multifamily community that bears a fixed interest rate of 3.46% per annum and matures on November 1, 2024.

On October 28, 2021, the Company's board of directors declared a quarterly dividend on its Common Stock of $0.175 per share, payable on January 14, 2022 to stockholders of record on December 15, 2021.

Between October 1, 2021 and October 31, 2021, the Company issued 49,049 shares of Common Stock under the 2019 ATM Offering at an average price of $12.43 per share, for aggregate gross proceeds of approximately $610,000 and, after deducting commissions and other costs, net proceeds of approximately $600,000.

Between October 1, 2021 and October 31, 2021, the Company issued 2,882 shares of Series M1 Preferred Stock and collected net proceeds of approximately $2.8 million after commissions and fees. During the same period, the Company redeemed 2,001 shares of Series A Preferred Stock, 267 mShares, 8 shares of Series A1 Preferred Stock, and 193 shares of Series M1 Preferred Stock.

On November 1, 2021, we repaid the mortgage debt in the amount of $27.4 million supporting our Champions Village grocery-anchored shopping center, and on November 2, 2021, we financed our Woodstock Crossing grocery-anchored shopping center with a $5.3 million mortgage bearing interest at a fixed rate of 2.89% per annum that matures on December 1, 2026.

On November 3, 2021, the Company closed on a real estate loan investment of up to $9.1 million, in support of a 246-unit multifamily community located in Atlanta, Georgia.

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

Significant Developments

During the three-month period ended September 30, 2021, we acquired four multifamily communities comprising an aggregate of 1,028 units and we closed on one real estate loan investment of up to approximately $23.2 million, in partial support of the development of a 352-unit multifamily community in suburban Atlanta, Georgia.

During the three-month period ended September 30, 2021, we issued 37,009 shares of Preferred Stock and redeemed or called 305,802 shares of Preferred Stock, for a net reduction of 268,793 shares of Preferred Stock, and a net cash outflow of approximately $272.0 million. During the same period, we issued and sold an aggregate of 1,167,626 shares of Common Stock under our ATM Offering, generating gross proceeds of approximately $12.9 million and, after deducting commissions and other costs, net proceeds of approximately $12.7 million. Our 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.

During the three-month period ended September 30, 2021, we sold seven office properties (Galleria 75, 150 Fayetteville, Capitol Towers, CAPTRUST Tower, Morrocroft Centre, Armour Yards, and 251 Armour Yards) and our 8West real estate loan investment for an aggregate gross sales price of approximately $725.0 million. We recognized an aggregate loss on sale of $12.0 million in the third quarter. We expect the disposition of these assets may result in a potentially material decrease in our revenues and results of operations. We used part of the proceeds from the sales to call approximately $288.3 million of our Series A Preferred Stock during the third quarter.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 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, changes to U.S. Government policies and 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 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, including any variants, on our business operations and the

economic conditions in the markets in which we operate;

• our ability to mitigate the impacts arising from COVID-19 or any variants thereof;

• 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, including the potential for the slowing of recent multifamily rent growth;

• 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 our property types;

• 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;

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

• adverse impacts on our cash flows and operating results from natural disasters and climate change.

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, 2020 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 Quarterly Report on Form 10-Q.

Industry Outlook

In spite of the COVID-19 pandemic, we believe continued, albeit sporadic, improvement in the United States' economy will take hold for the remainder of 2021, with continued improvement in the job market from pandemic lows and growth and improvements in the overall economy. As the country combats the effects of the COVID-19 pandemic with vaccine rollouts and other measures, it should be the case that the impact from the pandemic lessens and the economy can begin a path to normalcy. We believe a recovering economy, improving job market and increased consumer confidence should help create favorable conditions in the recovery for the multifamily sector, grocery-anchored shopping centers and Class A office demand.

Multifamily Communities

We continue to believe in the health of the multifamily industry, which is driven by both favorable demographic tailwinds and strong economic fundamentals.

Two of the nation’s largest generational cohorts - an estimated 72 million Millennials and 72 million Baby Boomers – continue to create demand for multifamily housing. Lifestyle trends within these groups support the multifamily thesis, with Millennials seeking flexibility and Baby Boomers looking to downsize and reduce ongoing maintenance required with home ownership. These trends are further amplified within our footprint and strategy: operating newly-constructed Class A communities in growing suburban Sunbelt markets. The Sunbelt continues to benefit from in-migration trends as weather, affordability and friendly business environments attract households and corporations alike. Millennials, who on average are forming households and starting families later than prior generations, are now searching for additional square footage, relative affordability and good schools; attributes that are generally more prevalent in the suburbs.

Fundamentally, the multifamily industry is benefiting from the current housing shortage in the United States, which Freddie Mac estimates at 3.8 million housing units as of the fourth quarter of 2020, an increase in the housing stock deficit of 52% from the 2.5 million housing units Freddie Mac estimated in 2018. Furthermore, we believe the U.S. is in the early stages of an economic expansion, which we believe will drive job growth and lead to increased multifamily demand. The sector continues to show resiliency and positive momentum as forecasts generally support stable occupancy, rent growth and net absorption of units.

Investors, both domestic and abroad, continue to seek quality multifamily housing given strong secular demand and the financial stability of the industry. Commercial real estate investment volume remains high with multifamily realizing more volume than any other property type; a trend that has been ongoing and is expected to continue. Moreover, mortgage production remains very healthy and efficient as Freddie Mac, Fannie Mae, life insurance companies and collateralized mortgage-backed securities lenders compete for borrowers as they see increased demand for multifamily debt, whether for their own account or securitized.

Strategically, the Company is focused on the goal of outperforming the multifamily market on a risk adjusted basis, as it looks for investments that offer an attractive location, superior product or provide a value proposition. Moreover, the Company is purposeful in its management of assets, aiming to provide a relatively stable and steady rental stream from its portfolio by employing principally fixed-rate long-term project-level debt financing and adhering to strict leasing guidelines regarding the credit worthiness of its tenants.

New Market Properties

We specialize in owning and operating shopping centers anchored by market-leading grocers complemented by convenience-based retailers across high-growth suburban Sunbelt markets. These centers are primarily anchored by Publix, Kroger, Harris Teeter and other market share leading grocers with high sales per square foot. We believe that our focus on an e-commerce resilient, daily needs-centric merchandising mix has our portfolio positioned well to flourish amidst the accelerated migration to the Sunbelt. Convenience-driven retail within our retail portfolio continues to thrive amidst the resurgence of the sector. Customers continue to rely on the brick-and-mortar footprints of retailers, with 11% more consumers planning to shop in store this holiday season than in 2019 according to Jones Lang LaSalle. Grocery stores also continue to flourish, with Publix's third quarter 2021 foot traffic 13.3% higher than 2019 levels.

The accelerated migration trends occurring in affluent and growing suburbs across the Sunbelt have tremendously benefited our retail portfolio. The states that our retail portfolio is located in have outpaced US population growth, increasing population by 12% over the last 10 years compared to the 7% national average. Suburban retail continues to benefit from increased workplace flexibility, allowing shoppers to work from home at their convenience, yielding more time spent closer to our assets. Retailers are recognizing each of these tailwinds and are focused on suburban Sunbelt expansion as a result.

We are encouraged by the strong retailer demand in our shopping centers and are strategically focusing on improving our overall merchandising mix to better our positioning in the ever-changing retail landscape. Our grocery partners are all engaged in further developing their curbside pickup and Buy Online Pickup in Store ("BOPIS") offerings as they establish themselves as the optimal last mile touchpoint for shoppers. Our tenant base has proven its resiliency during the pandemic. Our grocery partners continue to thrive, and our e-commerce and convenience focused tenancy is positioned well to benefit from the strong tailwinds that the suburbs throughout the Sunbelt are experiencing today.

Preferred Office Properties

Preferred Office Properties operates three Class A office assets comprising 1.2 million square feet in the Atlanta, San Antonio and Birmingham markets. New leasing activity has slowed and sublease availability has increased in most markets due to uncertainty from COVID-19. We expect to see some level of continued soft demand in the near-term. Despite these challenges, the Company’s office investments are 87% leased with only approximately 1.2% of the portfolio leases expiring through the end of 2022. Furthermore, multi-year contractual leases and rent schedules paired with high quality tenant balance sheets have offered protection against adverse impacts of COVID-19.

The pandemic has highlighted the trend of relocations out of larger gateway cities to the suburban, Sunbelt target markets. As the pandemic eases this trend could continue or abate as the market settles from the disruption of COVID-19. We continue to see interest in our assets from companies of varying sizes and from varying industries, which is a positive trend for our investment thesis and the markets in which we have invested.

The company sold a substantial majority of its office assets during the third quarter 2021. The sale of these assets marks a continuation of our stated strategy to simplify our investment focus, realign our balance sheet and to ultimately exit the office business entirely over time.

Critical Accounting Policies

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

K for the year ended December 31, 2020.

Off-Balance Sheet Arrangements

As of September 30, 2021, we had 1,084,471 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, 2021, a total of 531,522 Warrants had been exercised into 10,630,440 shares of Common stock. The 1,084,471 Warrants outstanding at September 30, 2021 have exercise prices that range between $19.50 and $26.34 per share. If all the Warrants outstanding at September 30, 2021 became exercisable and were exercised, gross proceeds to us would be approximately $438.9 million and we would as a result issue an additional 21,689,420 shares of Common Stock.

New Accounting Pronouncements

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

Results of Operations

Certain financial highlights of our results of operations for the three-month and nine-month periods ended September 30, 2021 and 2020 were:

Financial

•Our total revenues for the quarter ended September 30, 2021 decreased approximately $15.4 million, or 12.2%, to $111.0 million from the quarter ended September 30, 2020, due to the absence of revenues from the eight student housing properties that we sold on November 3, 2020 and the seven office properties and one real estate loan investment that we sold during the third quarter 2021. The student housing properties contributed approximately $12.5 million, or 9.9% of our total revenues and the disposed office properties and real estate loan investment contributed approximately $17.3 million, or 13.7% of our total

revenues for the quarter ended September 30, 2020. Excluding the contributions of these disposed assets, our year-over-year total revenues would have increased $7.7 million, or 8%.

•Our net loss per share was $(0.92) and $(0.79) for the three-month periods ended September 30, 2021 and 2020, respectively. Funds From Operations, or FFO, was $(0.31) and $0.17 per weighted average share of Common Stock and Class A Unit outstanding for the three months ended September 30, 2021 and 2020, respectively. The decrease in FFO per share was driven by:

*deemed dividends due to calls and cash redemptions of our preferred stock of $(0.51) per share;

*lower FFO resulting from the sale of our student housing properties in the fourth quarter 2020 and seven office properties and one real estate loan investment in the third quarter of 2021 of $(0.14) per share;

*partially offset by lower cash dividend requirements on our preferred stock of $0.13 per share; and

*improved multifamily same-store results of $0.04 per share.

•Our Core FFO per share increased to $0.28 for the third quarter 2021 from $0.26 for the third quarter 2020, due to:

*lower cash dividend requirements on our preferred stock of $0.13 per share;

*improved multifamily same-store results of $0.04 per share; and

•Our AFFO per share increased to $0.40 for the third quarter 2021 from $0.07 for the third quarter 2020 due to:

*accrued interest income received of $0.16 per share;

*lower cash dividend requirements on our preferred stock of $0.13 per share;

*cash received from purchase option termination agreements of $0.06 per share;

*smaller adjustments to remove non-cash revenues from amortization of deferred revenues, straight-line rent adjustments, above and below market leases and lease inducements of $0.05;

*improved multifamily same-store results of $0.04 per share; and

•Our Core FFO payout ratio to Common Stockholders and Unitholders was approximately 63.7% and our Core FFO payout ratio to our preferred stockholders was approximately 79.5% for the third quarter 2021. (A)

•Our AFFO payout ratio to Common Stockholders and Unitholders was approximately 44.6% and our AFFO payout ratio to our preferred stockholders was approximately 73.1% for the third quarter 2021.

•As of September 30, 2021, our total assets were approximately $3.7 billion, a net decrease from our total assets of approximately $4.7 billion at September 30, 2020, that primarily resulted from the sale of seven office properties during the third quarter 2021 and of our student housing portfolio during the fourth quarter 2020, offset by the acquisition of five multifamily communities (net of dispositions).

(A) We calculate the Core FFO and AFFO payout 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 ratios to preferred stockholders as the ratio of Preferred Stock dividends to the sum of Preferred Stock dividends and Core FFO and AFFO. 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.

Operational

•Our rental rates for our multifamily same-store properties for new and renewal leases increased 24.1% and 8.8% respectively and 15.6% blended for third quarter 2021 as compared to the expiring leases, excluding shorter-term leases of six months or less.

•Our rental rates for our multifamily same-store properties for new and renewal leases increased 25.6% and 13.3% respectively and 18.6% blended for October 2021 as compared to the expiring leases, excluding shorter-term leases of six months or less.

•As of September 30, 2021, the average age of our multifamily communities was approximately 6.1 years, which we believe is the youngest in the public multifamily REIT industry.

•As of September 30, 2021, all of our owned multifamily communities had achieved stabilization except for The Ellison (that was acquired on June 30, 2021), and Alleia at Presidio, The Anson, The Kingson, and Chestnut Farm, which were all acquired during the third quarter 2021. We define stabilization as reaching 93% occupancy for all three consecutive months within a single quarter.

•The average physical occupancy of our same-store multifamily communities increased to 97.1% for the three-month period ended September 30, 2021 from 95.6% for the three-month period ended September 30, 2020 and 96.8% for the three-month period ended June 30, 2021.

•Our average recurring rental revenue collections were approximately 99.2% for multifamily communities and 99.2% for grocery-anchored retail properties for the third quarter 2021.

Financing and Capital Markets

•As of September 30, 2021, approximately 95.1% of our permanent property-level mortgage debt has fixed interest rates and approximately 0.9% has variable interest rates which are capped. We believe we are well protected against potential increases in market interest rates. Our overall weighted average interest rate for our mortgage debt portfolio was 3.3% for multifamily communities, 4.2% for office properties, 3.9% for grocery-anchored retail properties and 3.5% in the aggregate.

•During the third quarter 2021, we issued and sold an aggregate of 37,009 shares of preferred stock and redeemed or called an aggregate of 305,802 shares of preferred stock, resulting in a net reduction of 268,793 outstanding shares of preferred stock, for a net redemption of approximately $272.0 million.

•At September 30, 2021, our leverage, as measured by the ratio of our debt to the undepreciated book value of our total assets, was approximately 57.6%.

•At September 30, 2021, we had $200.0 million available to be drawn on our revolving line of credit.

•During the third quarter 2021, we issued and sold an aggregate of 1,167,626 shares of Common Stock under our 2019 ATM Offering, generating gross proceeds of approximately $12.9 million and, after deducting commissions and other costs, net proceeds of approximately $12.7 million.

Significant Transactions

•During the third quarter 2021, we closed on the acquisition of four multifamily communities and the disposition of one multifamily community:

Multifamily Community

Location

Units

Acquisitions:

Alleia at Presidio

Fort Worth, Texas

231

The Anson

Nashville, Tennessee

301

The Kingson

Fredericksburg, Virginia

240

Chestnut Farm

Charlotte, North Carolina

256

Total

1,028

Disposition:

Vineyards

Houston, Texas

369

•During the third quarter 2021, we closed on the disposition of the following office buildings:

Property

Location

Gross Leasable Area ("GLA"), SF

Galleria 75

Atlanta, Georgia

111,000

150 Fayetteville

Raleigh, North Carolina

560,000

Capitol Towers

Charlotte, North Carolina

479,000

CAPTRUST Tower

Raleigh, North Carolina

300,000

Morrocroft Centre

Charlotte, North Carolina

291,000

Armour Yards Portfolio (1)

Atlanta, Georgia

222,000

Total

1,963,000

(1) Includes the Armour Yards and the 251 Armour Yards assets.

•During the third quarter 2021, we received the full principal and interest amounts due from the repayment of eleven real estate loan investments associated with six properties that totaled approximately $114.1 million, plus purchase option termination fee proceeds of approximately $5.4 million. These transactions collectively returned approximately $119.5 million of capital to us during the third quarter for investment, preferred stock redemptions, or other corporate purposes. Of the six properties represented by these loan payoffs, we acquired three of the assets.

•On August 11, 2021, we originated a real estate loan investment of up to approximately $23.2 million, in support of the development of a 352-unit multifamily community in suburban Atlanta, Georgia.

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 up to 15 basis points (if any), depending on the loan. As the market has become more competitive, our ability to negotiate purchase option discounts has become more difficult and we expect that to continue for the foreseeable future. Our purchase options are unlikely to include any discounts going forward unless the market has a significant change or reversal.

As of September 30, 2021, potential property acquisitions and units from projects in our real estate loan investment portfolio for which we hold a purchase option or right of first offer consisted of:

Total units upon

Purchase option window

Project/Property

Location

completion (1)

Begin

End

Multifamily communities

Purchase options at discount to market:

Hidden River II

Tampa, FL

204

S + 90 days (2)

S + 150 days (2)

Purchase options at market or with rights of first offer:

Hudson at Metro West

Orlando, FL

320

S + 90 days (2)

S + 150 days (2)

Vintage Horizon West

Orlando, FL

340

(3)

Vintage Jones Franklin

Raleigh, NC

277

(3)

Club Drive

Atlanta, GA

352

(5)

Populus at Pooler

Savannah, GA

316

(6)

Solis Cumming Town Center

Atlanta, GA

320

(4)

2,129

(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.

(2) The option period window begins and ends at the number of days indicated beyond the achievement of a 93% occupancy threshold by the underlying property.

(3) 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% occupancy threshold by the underlying property and ends 60 days beyond the option period beginning date.

(4) We hold a right of first offer on the property.

(5) The option period begins upon the property's achievement of an 85% occupancy threshold. If we are unable to reach an agreement on the property's market value, we have a right of first offer.

(6) The option period begins upon the property's achievement of an 80% occupancy threshold. If we are unable to reach an agreement on the property's market value, we have a right of first offer.

Three-month and nine-month periods ended September 30, 2021 compared to 2020

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, 2021 versus 2020:


Preferred Apartment Communities, Inc.	Three-month periods ended September 30,				Change inc (dec)
(in thousands)	2021		2020		Amount		Percentage
Revenues:
Rental and other property revenues	$	99,050	$	114,831	$	(15,781)	(13.7)	%
Interest income on loans and notes receivable	11,241		10,649		592		5.6	%
Interest income from related parties	415		609		(194)		(31.9)	%
Miscellaneous revenues	306		363		(57)		(15.7)	%

Total revenues	111,012		126,452		(15,440)		(12.2)	%

Operating expenses:
Property operating and maintenance	14,956		19,437		(4,481)		(23.1)	%
Property salary and benefits	4,929		6,054		(1,125)		(18.6)	%
Property management costs	757		983		(226)		(23.0)	%
Real estate taxes and insurance	14,506		16,369		(1,863)		(11.4)	%
General and administrative	7,772		7,203		569		7.9	%
Equity compensation to directors and executives	817		582		235		40.4	%
Depreciation and amortization	39,639		51,794		(12,155)		(23.5)	%
Allowance for expected credit losses	265		(152)		417		—
Management internalization expense	242		577		(335)		(58.1)	%

Total operating expenses	83,883		102,847		(18,964)		(18.4)	%

Operating income before gains on sales of real estate and loss from unconsolidated joint venture	27,129		23,605		3,524		14.9	%
Loss from unconsolidated joint venture	(187)		(120)		(67)		—
Gains from sales of real estate	7,942		3,261		4,681		143.5	%
Operating income	34,884		26,746		8,138		30.4	%
Interest expense	24,847		29,879		(5,032)		(16.8)	%
Loss on extinguishment of debt	—		(518)		518		—
Loss on sale of real estate loan	(12)		—		(12)		—
Gain on sale of land	—		49		(49)		—

Net income (loss)	10,025		(3,602)		13,627		—
Consolidated net (income) loss attributable to non-controlling interests	(48)		108		(156)		—

Net income (loss) attributable to the Company	$	9,977	$	(3,494)	$	13,471	—


Preferred Apartment Communities, Inc.	Nine-month periods ended September 30,				Change inc (dec)
(in thousands)	2021		2020		Amount		Percentage
Revenues:
Rental and other property revenues	$	308,670	$	338,271	$	(29,601)	(8.8)	%
Interest income on loans and notes receivable	34,567		34,495		72		0.2	%
Interest income from related parties	1,230		3,750		(2,520)		(67.2)	%
Miscellaneous revenues	951		3,798		(2,847)		(75.0)	%

Total revenues	345,418		380,314		(34,896)		(9.2)	%

Operating expenses:
Property operating and maintenance	45,785		53,566		(7,781)		(14.5)	%
Property salary and benefits	14,664		16,965		(2,301)		(13.6)	%
Property management costs	2,789		4,028		(1,239)		(30.8)	%
Real estate taxes and insurance	46,155		48,831		(2,676)		(5.5)	%
General and administrative	23,007		20,978		2,029		9.7	%
Equity compensation to directors and executives	2,316		1,058		1,258		118.9	%
Depreciation and amortization	130,198		153,096		(22,898)		(15.0)	%
Asset management and general and administrative expense fees to related party	—		3,099		(3,099)		—
Allowance for expected credit losses	(58)		5,463		(5,521)		—
Management internalization expense	727		179,828		(179,101)		(99.6)	%

Total operating expenses	265,583		486,912		(221,329)		(45.5)	%

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

Net operating expenses	265,583		485,776		(220,193)		(45.3)	%

Operating income (loss) before loss from unconsolidated joint venture and gain on sale of real estate	79,835		(105,462)		185,297		(175.7)	%
Loss from unconsolidated joint venture	(556)		(120)		(436)		—
Gain on sale of real estate, net	8,740		3,261		5,479		168.0	%
Operating income (loss)	88,019		(102,321)		190,340		—
Interest expense	79,134		90,608		(11,474)		(12.7)	%
Loss on extinguishment of debt	—		(6,674)		6,674		—
Loss on sale of real estate loan	(12)		—		(12)		—
Gain on sale of land	—		528		(528)		—

Net income (loss)	8,873		(199,075)		207,948		—
Consolidated net loss attributable to non-controlling interests	11		3,515		(3,504)		(99.7)	%

Net income (loss) attributable to the Company	$	8,884	$	(195,560)	$	204,444	—

New Market Properties, LLC

Our New Market Properties, LLC business consists of our portfolio of grocery-anchored shopping centers. Comparative statements of operations of New Market Properties, LLC for the three-month and nine-month periods ended September 30, 2021 versus 2020 are presented below. These statements of operations exclude certain allocations of corporate overhead or other expenses.


New Market Properties, LLC	Three-month periods ended September 30,				Change inc (dec)
(in thousands)	2021		2020		Amount		Percentage
Revenues:
Rental revenues & other property revenues	$	27,078	$	26,707	$	371	1.4	%

Operating expenses:
Property operating and maintenance	3,351		3,291		60		1.8	%
Property management fees	534		528		6		1.1	%
Real estate taxes and insurance	3,591		3,502		89		2.5	%
General and administrative	952		945		7		0.7	%
Equity compensation to directors and executives	61		19		42		221.1	%
Depreciation and amortization	11,363		12,688		(1,325)		(10.4)	%
Total operating expenses	19,852		20,973		(1,121)		(5.3)	%

Operating income before gain on sale of real estate and loss from unconsolidated joint venture	7,226		5,734		1,492		26.0	%
Loss from unconsolidated joint venture	(187)		(120)		(67)		—
Gain on sale of real estate, net	—		3,261		(3,261)		—
Operating income	7,039		8,875		(1,836)		(20.7)	%

Interest expense	6,463		6,539		(76)		(1.2)	%
Gain on sale of land	—		49		(49)		—
Net income	576		2,385		(1,809)		(75.8)	%

Consolidated net (income) attributable to non-controlling interests	(3)		(43)		40		—

Net income attributable to the Company	$	579	$	2,428	$	(1,849)	—


New Market Properties, LLC	Nine-month periods ended September 30,				Change inc (dec)
(in thousands)	2021		2020		Amount		Percentage
Revenues:
Rental revenues & other property revenues	$	80,921	$	80,651	$	270	0.3	%
Interest income on notes receivable	—		164		(164)		—
Total revenues	80,921		80,815		106		0.1	%

Operating expenses:
Property operating and maintenance	10,144		9,831		313		3.2	%
Property management fees	1,733		1,921		(188)		(9.8)	%
Real estate taxes and insurance	11,683		11,703		(20)		(0.2)	%
General and administrative	2,758		2,662		96		3.6	%
Equity compensation to directors and executives	155		47		108		229.8	%
Depreciation and amortization	34,749		39,410		(4,661)		(11.8)	%
Asset management and general and administrative expense fees to related parties	—		720		(720)		—
Total operating expenses	61,222		66,294		(5,072)		(7.7)	%
Waived asset management and general and administrative expense fees	—		(17)		17		—
Net operating expenses	61,222		66,277		(5,055)		(7.6)	%

Operating income before gain on sale of real estate and loss from unconsolidated joint venture	19,699		14,538		5,161		35.5	%
Loss from unconsolidated joint venture	(556)		(120)		(436)		363.3	%
Gain on sale of real estate, net	—		3,261		(3,261)		—
Operating income	19,143		17,679		1,464		8.3	%

Interest expense	19,397		19,876		(479)		(2.4)	%
Gain on sale of land	15		528		(513)		(97.2)	%
Net loss	(239)		(1,669)		1,430		(85.7)	%

Consolidated net loss attributable to non-controlling interests	(38)		(82)		44		—

Net loss attributable to the Company	$	(201)	$	(1,587)	$	1,386	—

Recent acquisitions

Our dispositions (partially offset by acquisitions) of real estate assets since January 1, 2020 were the primary drivers behind our decreases in rental and property revenues and property operating expenses for the three-month and nine-month periods ended September 30, 2021 versus 2020, as listed in the tables below:

Real estate assets acquired

Acquisition date

Property

Location

Units

Leasable square feet

Residential Properties:

3/31/2020

Horizon at Wiregrass

Tampa, FL

392

—

4/30/2020

Parkside at the Beach

Panama City Beach, FL

288

—

11/2/2020

The Blake

Orlando, FL

281

—

12/15/2020

The Menlo

Jacksonville, FL

332

—

6/30/2021

The Ellison

Atlanta, GA

250

—

7/8/2021

Alleia at Presidio

Ft. Worth, TX

231

—

9/14/2021

The Anson

Nashville, TN

301

—

9/16/2021

The Kingson

Fredericksburg, VA

240

—

9/17/2021

Chestnut Farm

Charlotte, NC

256

—

New Market Properties:

1/29/2020

Wakefield Crossing

Raleigh, NC

—

75,927

3/19/2020

Midway Market

Dallas, TX

—

85,599

2,571

161,526

Real estate assets sold

Disposition date

Property

Location

Units

Beds

Student housing properties:

11/3/2020

North by Northwest

Tallahassee, FL

219

679

11/3/2020

SoL

Tempe, AZ

224

639

11/3/2020

Stadium Village

Atlanta, GA

198

792

11/3/2020

Ursa

Waco, TX

250

840

11/3/2020

The Tradition

College Station, TX

427

808

11/3/2020

Knightshade

Orlando, FL

221

894

11/3/2020

The Bloc

Lubbock, TX

140

556

11/3/2020

Rush

Charlotte, NC

332

887

Multifamily communities:

11/12/2020

Avenues at Creekside

San Antonio, TX

395

—

7/19/2021

Vineyards

Houston, TX

369

—

Office properties:

Gross leasable area (SF)

7/29/2021

Galleria 75

Atlanta, GA

111,000

7/29/2021

150 Fayetteville

Raleigh, NC

560,000

7/29/2021

Capitol Towers

Charlotte, NC

479,000

7/29/2021

CAPTRUST Tower

Raleigh, NC

300,000

7/29/2021

Morrocroft Centre

Charlotte, NC

291,000

9/8/2021

Armour Yards Portfolio

Atlanta, GA

222,000

1,963,000

Rental and other property revenues

Rental and other property revenues decreased 13.7% and 8.8% for the three-month and nine-month periods ended September 30, 2021, respectively, versus the corresponding periods of 2020, primarily due to the sale of our student housing properties in the fourth quarter 2020 and the sale of seven office properties during the third quarter of 2021. Changes in occupancy rates and in percentages of leased space and rent growth are the primary drivers of changes 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.

Interest income

Interest income from our real estate loan and note investments, including interest income from related party investments, decreased 67% for the nine-month period ended September 30, 2021 versus the corresponding period of 2020, primarily due to an overall decrease in current and deferred interest revenue from our smaller portfolio of real estate loan investments and notes receivable. The principal amount outstanding on our portfolio of real estate loan investments decreased to approximately $191.0 million at September 30, 2021 from $323.6 million at September 30, 2020. During the third quarter 2021, we recorded purchase option termination fee income of approximately $2.6 million on real estate loan investments that supported the Cameron Square and V & Three multifamily communities. Comparatively, we only recorded purchase option termination fee income of approximately $0.4 million on real estate loan investments during the third quarter of 2020. These increased revenues from purchase option termination fees offset the smaller revenue stream of current and deferred interest described above. As of September 30, 2021, we have no further purchase option termination fees remaining to be amortized into interest income from real estate loan investments.

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

Miscellaneous revenues

Miscellaneous revenues decreased 75% for the nine-month period ended September 30, 2021 versus the corresponding period of 2020, primarily due to the recognition of a forfeited earnest money deposit of $2.75 million from a prospective purchaser of six of our student housing properties during the first quarter 2020.

Property-level expenses

Property operating and maintenance, property salary and benefits, property management costs and real estate taxes and insurance decreased uniformly for the three-month and nine-month periods ended September 30, 2021, respectively, versus the corresponding periods of 2020, primarily due to the sale of our student housing properties in the fourth quarter 2020 and the sale of seven office properties during the third quarter 2021. The primary components of operating and maintenance expense are utilities, property repairs, and landscaping costs. The expenses incurred for property repairs and, to a lesser extent, utilities could generally be expected to increase gradually over time as the buildings and properties age. Utility costs may generally be expected to increase in future periods as rate increases from providing carriers are passed on to our residents and tenants.

General and administrative

General and administrative expenses increased 7.9% and 9.7% for the three-month and nine-month periods ended September 30, 2021, respectively, versus the corresponding periods of 2020, primarily due to increased compensation costs.

Equity compensation to directors and executives

Equity compensation expenses increased 40.4% and 118.9% for the three-month and nine-month periods ended September 30, 2021, respectively, versus the corresponding periods of 2020, primarily due to issuances of restricted stock and restricted stock units since March 31, 2020. These instruments have a collective fair value of approximately $12.9 million, that will be amortized as described in Note 8 to our Consolidated Financial Statements.

Asset management fees and general and administrative fees to related party

Monthly asset management fees and general and administrative expense fees ceased effective with the closing of our Internalization Transaction on January 31, 2020.

Allowance for expected credit losses

Our allowance for expected credit losses on our real estate loan investments increased for the three-month period ended September 30, 2021 versus the corresponding period of 2020 as we recorded reserves on interest revenue from our Haven line of credit outweighed the decreases in reserves from the sale or repayment of eleven real estate loans during the third quarter 2021. The primary driver of the decrease for the nine-month period 2021 versus the 2020 period was due to the repayment of eleven real estate loan investments and the sale of the 8West loan.

Management Internalization expense

On January 31, 2020, we internalized the functions performed by the Former Manager and the Sub-Manager by acquiring the entities that own the 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.

Interest expense

Our interest expense decreased 16.8% and 12.7% for the three-month and nine-month periods ended September 30, 2021, respectively, versus the corresponding periods of 2020, primarily due to the sale of our student housing properties in the fourth quarter 2020 and the sale of seven office properties during the third quarter of 2021.

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 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. The non-GAAP measures of FFO, Core FFO, AFFO and 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 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 line of credit and loan coordination fees;

• losses on debt extinguishments or refinancing costs;

• Internalization costs;

• expenses incurred on calls of preferred stock;

• deemed dividends for redemptions of and non-cash dividends on preferred stock;

• expenses related to the COVID-19 global pandemic; 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;

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

• amortization of loan closing costs;

• depreciation and amortization of non-real estate assets;

• net loan origination fees received;

• deferred interest income received;

• amortization of lease inducements;

• cash received in excess of (exceeded by) amortization of purchase option termination revenues;

• non-cash dividends on Series M1 Preferred Stock and mShares; and

• earnest money forfeiture from prospective asset purchaser;

Less:

• non-cash loan interest income;

• cash paid for loan closing costs;

• amortization of straight-line rent adjustments and acquired real estate intangible assets and/or liabilities;

• amortization of deferred revenues; and

• normally-recurring capital expenditures and capitalized second generation 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, Core FFO and AFFO
to Net (Loss) Income Attributable to Common Stockholders
		Three months ended September 30,
(In thousands, except per-share figures)		2021		2020

Net loss attributable to common stockholders (See note 1)		$	(47,999)	$	(39,499)

Add:	Depreciation of real estate assets	32,807		41,282
	Amortization of acquired intangible assets and deferred leasing costs	6,613		9,978
	Net loss attributable to Class A Unitholders (See note 2)	94		(50)
	Gain on sale of real estate	(7,942)		(3,261)
FFO attributable to common stockholders and unitholders		(16,427)		8,450

	Acquisition and pursuit costs	—		3
	Loan cost amortization on acquisition line of credit and loan coordination fees (See note 3)	380		505
	Payment of costs related to property refinancing	388		509
	Internalization costs (See note 4)	242		577
	Deemed dividends for redemptions of and non-cash dividends on preferred stock, plus
	expenses incurred on calls of preferred stock (See note 5)	30,332		3,107
	Expenses related to the COVID-19 global pandemic (See note 6)	34		138
Core FFO attributable to common stockholders and unitholders		14,949		13,289

Add:	Non-cash equity compensation to directors and executives	817		582
	Amortization of loan closing costs (See note 7)	1,244		1,288
	Depreciation/amortization of non-real estate assets	445		621
	Net loan origination fees received (See note 8)	684		415
	Deferred interest income received (See note 9)	9,094		375
	Amortization of lease inducements (See note 10)	449		448
	Cash received in excess of (exceeded by) amortization of purchase option termination revenues (See note 11)	2,754		(421)
Less:	Non-cash loan interest income (See note 12)	(2,330)		(3,317)
	Non-cash income for current expected credit losses (See note 13)	(149)		(761)
	Cash paid for loan closing costs	(150)		(106)
	Amortization of acquired real estate intangible liabilities and straight-line rent adjustments (See note 14)	(2,401)		(4,887)
	Amortization of deferred revenues (See note 15)	(940)		(940)
	Normally recurring capital expenditures (See note 16)	(3,145)		(2,983)

AFFO attributable to common stockholders and Unitholders		$	21,321	$	3,603

Common Stock dividends and distributions to Unitholders declared:
	Common Stock dividends	$	9,432	$	8,876
	Distributions to Unitholders (See note 2)	87		130
	Total	$	9,519	$	9,006

Common Stock dividends and Unitholder distributions per share		$	0.1750	$	0.1750

FFO per weighted average basic share of Common Stock and Unit outstanding		$	(0.31)	$	0.17
Core FFO per weighted average basic share of Common Stock and Unit outstanding		$	0.28	$	0.26
AFFO per weighted average basic share of Common Stock and Unit outstanding		$	0.40	$	0.07

Weighted average shares of Common Stock and Units outstanding:
	Basic:
	Common Stock	52,455		49,689
	Class A Units	497		742
	Common Stock and Class A Units	52,952		50,431

	Diluted Common Stock and Class A Units (See note 17)	53,472		50,433

Actual shares of Common Stock outstanding, including 662 and 548 unvested shares
of restricted Common Stock at September 30, 2021 and 2020, respectively.		53,559		50,449
Actual Class A Units outstanding at September 30, 2021 and 2020, respectively.		496		742
	Total	54,055		51,191

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


Reconciliation of FFO Attributable to Common Stockholders and Unitholders, Core FFO and AFFO
to Net (Loss) Income Attributable to Common Stockholders
		Nine months ended September 30,
(In thousands, except per-share figures)		2021		2020

Net loss attributable to common stockholders (See note 1)		$	(117,175)	$	(300,270)

Add:	Depreciation of real estate assets	105,616		122,053
	Amortization of acquired intangible assets and deferred leasing costs	23,809		28,933
	Net loss attributable to Class A Unitholders (See note 2)	77		(3,393)
	Gain on sale of real estate	(8,740)		(3,261)
FFO attributable to common stockholders and unitholders		3,587		(155,938)
	Acquisition and pursuit costs	5		381
	Loan cost amortization on acquisition line of credit and loan coordination fees (See note 3)	1,286		1,711
	Payment of costs related to property refinancing	506		7,372
	Internalization costs (See note 4)	727		179,828
	Deemed dividends for redemptions of and non-cash dividends on preferred stock, plus
	expenses incurred on calls of preferred stock (See note 5)	38,269		6,423
	Expenses related to the COVID-19 global pandemic (See note 6)	115		586
	Earnest money forfeited by prospective asset purchaser	—		(2,750)
Core FFO attributable to common stockholders and unitholders		44,495		37,613

Add:	Non-cash equity compensation to directors and executives	2,316		1,058
	Non-cash (income) expense for current expected credit losses (See note 13)	(1,288)		3,647
	Amortization of loan closing costs (See note 7)	3,701		3,631
	Depreciation/amortization of non-real estate assets	1,336		1,793
	Net loan origination fees received (See note 8)	1,887		882
	Deferred interest income received (See note 9)	13,580		8,652
	Amortization of lease inducements (See note 10)	1,349		1,334
	Earnest money forfeited by prospective asset purchaser	—		2,750
	Cash received in excess of (exceeded by) amortization of purchase option termination revenues (See note 11)	2,777		(96)
Less:	Non-cash loan interest income (See note 12)	(8,113)		(9,445)
	Cash paid for loan closing costs	(2,041)		(106)
	Amortization of acquired real estate intangible liabilities and straight-line rent adjustments (See note 14)	(8,964)		(13,684)
	Amortization of deferred revenues (See note 15)	(2,821)		(2,821)
	Normally recurring capital expenditures (See note 16)	(9,475)		(6,525)

AFFO attributable to common stockholders and Unitholders		$	38,739	$	28,683
Common Stock dividends and distributions to Unitholders declared:
	Common Stock dividends	27,682		29,991
	Distributions to Unitholders (See note 2)	270		463
	Total	27,952		30,454

Common Stock dividends and Unitholder distributions per share		$	0.5250	$	0.6125

FFO per weighted average basic share of Common Stock and Unit outstanding		$	0.07	$	(3.17)
Core FFO per weighted average basic share of Common Stock and Unit outstanding		$	0.86	$	0.77
AFFO per weighted average basic share of Common Stock and Unit outstanding		$	0.75	$	0.58
Weighted average shares of Common Stock and Units outstanding:
	Basic:
	Common Stock	51,011		48,351
	Class A Units	547		776
	Common Stock and Class A Units	51,558		49,127

	Diluted Common Stock and Class A Units (See note 17)	51,945		49,144
Actual shares of Common Stock outstanding, including 662 and 548 unvested shares
of restricted Common Stock at September 30, 2021 and 2020, respectively.		53,559		50,449
Actual Class A Units outstanding at September 30, 2021 and 2020, respectively.		496		742
	Total	54,055		51,191

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 Loss Attributable to Common Stockholders

1)Rental and other property revenues and property operating expenses for the three months ended September 30, 2021 include activity for the properties acquired since September 30, 2020. Rental and other property revenues and expenses for the three-month and nine-month periods ended September 30, 2020 include activity for the acquisitions made during that period only from their respective dates of acquisition.

2)Non-controlling interests in our Operating Partnership, consisted of a total of 496,269 Class A Units as of September 30, 2021. 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 0.94% and 1.47% for the three-month periods ended September 30, 2021 and 2020, respectively.

3) We paid loan coordination fees to Preferred Apartment Advisors, LLC, (our "Former Manager") to reflect the administrative effort involved in arranging debt financing for acquired properties prior to the Internalization Transaction (defined in note 4 below). The fees 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, 2021, aggregate unamortized loan coordination fees were approximately $8.3 million, which will be amortized over a weighted average remaining loan life of approximately 10.2 years.

4) This adjustment reflects the add-back of (i) consideration paid to the owners of the Former Manager and NMP Advisors, LLC (our "Former Sub-Manager"), (ii) accretion of the discount on the deferred liability payable to the owners of the Former Manager and (iii) due diligence and pursuit costs incurred by the Company related to the internalization of the functions performed by the Former Manager and Former Sub-Manager (the "Internalization Transaction").

5) This additive adjustment removes the effect of deemed dividends that arise from cash calls and redemptions of preferred stock. For preferred stock shares that are called by the Company or redeemed by the holder, the Company records a deemed dividend for the difference between the redemption of the share at its face value, net of any redemption discount, as compared to the carrying value of the share on the Company’s consolidated balance sheets. Also included in this adjustment is the adding back of expenses incurred related to effecting calls of preferred stock.

6) This additive adjustment to FFO consists of non-recurring costs for signage, cleaning and supplies necessary to create and maintain work environments necessary to adhere to CDC guidelines during the current COVID-19 pandemic. Since we do not expect to incur similar costs once the COVID-19 pandemic has subsided, we add these costs back to FFO in our calculation of Core FFO.

7) 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. 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, 2021, unamortized loan costs on all the Company's indebtedness were approximately $30.4 million, which will be amortized over a weighted average remaining loan life of approximately 8.0 years.

8) We receive loan origination fees in conjunction with the origination of certain real estate loan investments. The total fees received are additive adjustments to Core FFO in our calculation of AFFO.

9) 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. Once received from the borrower, the amount of additional accrued interest becomes an additive adjustment to Core FFO in our calculation of AFFO.

10) 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.

11) Occasionally we receive fees in exchange for the termination of our purchase options related to certain multifamily communities. These fees are recorded as revenue over the period beginning on the date of termination 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 periods in which recognized termination fee revenues exceeded the amount of cash received, a negative adjustment is shown to Core FFO in our calculation of AFFO; for periods in which cash received exceeded the amount of recognized termination fee revenues, an additive adjustment is shown to Core FFO in our calculation of AFFO.

12) Loan origination fees (described in note 8 above) are recognized as revenue over the lives of the applicable loans as adjustments of yield using the effective interest method. Similarly, the accrual of additional interest amounts (described in note 9 above) are recognized beginning from loan inception through the repayment of the loan or the refinancing or sale of the underlying property. This adjustment removes the effect of both these types of non-cash loan interest income from Core FFO in our calculation of AFFO.

13) 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 Core FFO in calculating AFFO.

14) This adjustment reflects straight-line rent adjustments and the reversal of the non-cash amortization of below-market and above-market lease intangibles, which were recognized in conjunction with our acquisitions and which are amortized over the estimated average remaining lease terms from the acquisition date for multifamily communities and over the remaining lease terms for grocery-anchored shopping center assets and office buildings. At September 30, 2021, the balance of unamortized below-market lease intangibles was approximately $37.1 million, which will be recognized over a weighted average remaining lease period of approximately 8.3 years.

15) 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.

16) 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 $21,000 and $59,000 of recurring capitalized expenditures incurred at our corporate offices during the three-month and nine-month periods ended September 30, 2021, respectively. No adjustment is made in the calculation of AFFO for nonrecurring capital expenditures. See Capital Expenditures, Grocery-Anchored Shopping Center Portfolio, and Office Building Portfolio sections for definitions of these terms.

17) Since our AFFO results are positive for the periods reflected, 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.

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, 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, grocery-anchored shopping centers and office properties;

•interest and principal payments 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 May 4, 2021, Carveout and PAC-OP, (collectively, the “Borrowers”) and the Company entered into Amendment No. 3 to the Fourth Amended and Restated Credit Agreement, or our Amended and Restated Credit Agreement, which (i) extended the maturity date for the Revolving Facility to May 4, 2024, with an option to extend the maturity date to May 4, 2025, (ii) added Carveout as a borrower and (iii) modified certain of the financial covenants. As of September 30, 2021, the outstanding balance on the Revolving Facility was $0. The Revolving Line of Credit accrues interest at a variable rate of KeyBank's prime rate plus 0.5%, the Adjusted Eurodollar Rate for a one-month interest period plus 1.00%, or the one- or three-month per annum LIBOR, as selected by the Borrowers, plus an applicable margin of 1.50% to 3.50% per annum, depending upon our leverage ratio. The weighted average interest rate for the Revolving Line of Credit was 3.62% for the nine months ended September 30, 2021. The Amended and Restated Credit Agreement also reduced the commitment fee on the average daily unused portion of the Revolving Line of Credit to 0.20% or 0.25% per annum, depending upon our outstanding Credit Facility balance. At September 30, 2021, we had $200 million available to be drawn by us on the Revolving Line of Credit.

The COVID-19 pandemic has the potential to affect our short-term cash flows, if multifamily tenants lose their jobs due to business closings, 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 previously 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, 2021, we were in compliance with all covenants related to the Fourth Amended and Restated Credit Agreement, as amended. 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 Freddie Mac through KeyBank to obtain 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 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. At September 30, 2021, we had $90.0 million available to be drawn by us on the Acquisition Facility.

Our net cash provided by operating activities for the nine-month period ended September 30, 2021 was approximately $164.9 million and net cash provided by operating activities for the nine-month period ended September 30, 2020 was approximately $30.0 million. The Internalization transaction that closed in the first quarter 2020 reflected one-time cash payments to the entities that owned the Former Manager and Former Sub-Manager that totaled approximately $111.1 million, plus approximately $3.8 million in related professional fees.

The majority of our revenue is derived from residents and tenants under existing leases at our residential properties, grocery-anchored shopping centers and office properties. Therefore, our operating cash flow is principally dependent on: (1) the number of residential 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.

Our net cash provided by investing activities for the nine-month period ended September 30, 2021 was approximately $73.6 million and net cash used in investing activities for the nine-month period ended September 30, 2020 was approximately $155.2 million. Cash collected from the disposition of the seven office assets and one multifamily community during the third quarter 2021 totaled approximately $330.6 million and we collected approximately $133.0 million from repayments of real estate loan investments.

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

For the nine-month period ended September 30, 2021, our capital expenditures for our multifamily communities, not including changes in related payables, were as follows:


(In thousands, except per-unit amounts)	Capital Expenditures
	Recurring				Non-recurring				Total
	Amount		Per Unit		Amount		Per Unit		Amount		Per Unit
Appliances	$	533	$	47.43	$	—	$	—	$	533	$	47.43
Carpets	1,530		136.03		—		—		1,530		136.03
Wood flooring / vinyl	224		19.96		397		35.26		621		55.22
Blinds and ceiling fans	147		13.04		—		—		147		13.04
Fire safety	—		—		497		44.23		497		44.23
Furnace, air (HVAC)	645		57.34		—		—		645		57.34
Computers, equipment, misc.	25		2.21		156		13.84		181		16.05
Elevators	2		0.21		52		4.60		54		4.81
Exterior painting and lighting	—		—		2,023		179.84		2,023		179.84
Leasing office / common amenities	39		3.47		692		61.49		731		64.96
Major structural	—		—		1,281		113.97		1,281		113.97
Cabinets, countertops and unit upgrades	—		—		1,436		127.69		1,436		127.69
Landscaping & fencing	—		—		561		49.90		561		49.90
Parking lots and sidewalks	163		14.45		150		13.35		313		27.80
Signage and sanitation	—		—		91		8.06		91		8.06

	$	3,308	$	294.14	$	7,336	$	652.23	$	10,644	$	946.37

In addition, second-generation capital expenditures within our grocery-anchored shopping center portfolio for the nine-month periods ended September 30, 2021 and 2020 totaled $4.0 million and $2.0 million, respectively, and within our office properties portfolio for the nine-month periods ended September 30, 2021 and 2020 totaled $2.2 million and $0.7 million, respectively. We define second-generation capital expenditures as those that exclude expenditures made in our grocery-anchored shopping center and office properties portfolios (i) to lease space to "first generation" tenants (i.e. leasing capital for existing vacancies and known move-outs at the time of acquisition), (ii) to bring recently acquired properties up to our ownership standards, and (iii) for property re-developments and repositioning.

At September 30, 2021, we had restricted cash of approximately $54.0 million. These funds are restricted for a variety of purposes, such as commitments to fund capital expenditures and lender required escrows for future real estate tax and insurance payments. At September 30, 2021, our restricted cash for future real estate tax and insurance payments was approximately $32.3 million. Typically these escrows increase in the second and third quarters of each calendar year as the Company pays monthly mortgage installments, of which a portion goes to these escrows, until payments are made to the taxing authorities (generally in the first and fourth quarters of each calendar year). Additionally, through the mortgage refinances that the Company executed since March 31, 2020, our lenders required us to put an additional $3.3 million into escrows related to the COVID-19 pandemic. These escrows will be released back to us upon the cessation of all governmental emergency declarations and certain other performance conditions.

Net cash used in financing activities for the nine-month period ended September 30, 2021 was approximately $205.6 million and net cash provided by financing activities for the nine-month period ended September 30, 2020 was approximately $84.0 million. For the nine-month period ended September 30, 2021, payments for redemptions and calls of preferred stock totaled approximately $358.6 million, as compared to approximately $82.0 million for the nine-month period ended September 30, 2020. Repayments of mortgage debt totaled $76.3 million for the nine-month period ended September 30, 2021, versus $173.4 million for the nine-month period ended September 30, 2020.

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 Preferred Stock, mShares, Series A1 Redeemable Preferred Stock and Series M1 Redeemable Preferred Stock (collectively, our Preferred Stock), through net cash generated from operating results.

Our board of directors reviews the Preferred Stock 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 Preferred Stock 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 Preferred Stock dividend payments to increase at a rate that approximates the rate at which we issue new shares of Preferred Stock, less those shares redeemed.

Our third quarter 2021 Common Stock dividend declaration was $0.175 per share. 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 nine months ended September 30, 2021, our aggregate dividends and distributions totaled approximately $153.6 million and our net cash provided by operating activities were approximately $164.9 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 Preferred Stock 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, grocery-anchored shopping centers and office properties;

•costs associated with current and future capital raising activities;

•costs to acquire additional multifamily communities, grocery-anchored shopping centers 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 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 September 27, 2019, our registration statement on Form S-3 (Registration No. 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 a maximum of 1,000,000 shares of Series A1 Redeemable Preferred Stock, Series M1 Redeemable Preferred Stock or a combination of both. The stated price per share is $1,000, subject to adjustment under certain conditions. The shares are being offered by Preferred Capital Securities, LLC (“PCS”) on a "reasonable best efforts" basis, and we intend to invest substantially all the net proceeds of the Series A1/M1 Offering in connection with the acquisition of multifamily communities and grocery-anchored shopping centers, and making real estate loans and mortgages, other real estate-related investments and general working capital purposes.

At September 30, 2021, the Company's active equity offerings consisted of:

During the third quarter 2021, we issued and sold an aggregate of 37,009 shares of Preferred Stock and redeemed an aggregate of 305,802 shares of Preferred Stock, resulting in a net reduction of 268,793 shares of Preferred Stock, for a net redemption cost of $272.0 million. Also during the third quarter 2021, we issued and sold an aggregate of 1,167,626 shares of Common Stock under our 2019 ATM Offering, generating gross proceeds of approximately $12.9 million and, after deducting commissions and other costs, net proceeds of approximately $12.7 million.

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. Neither our charter nor our by-laws contain any limitation on the amount of leverage we may use. These targets, however, will not apply to individual real estate assets or investments.

The amount of leverage we will place on individual investments will depend on our 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 loan extension risk in the portfolio;

•The availability and cost of financing an asset;

•Our opinion of the creditworthiness of our financing counterparties; and

•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 to the yield curve, the level and volatility of interest rates and their associated credit spreads, the underlying value 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 an 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 (who have been a significant and consistent source of financing to the Company and the multifamily market generally), and as market conditions permit, access borrowings that are advantageous to us. It is important to note that Freddie Mac and Fannie Mae are both GSEs (Government Sponsored Entities). GSE reform has been a topic of debate in Congress for several years now, and it is possible that Congress or the FHFA (Federal Housing Finance Agency) could materially change the terms and/or availability of mortgage debt to the multifamily industry. These or other changes to the multifamily lending programs of Freddie Mac and Fannie Mae could materially affect our ability to acquire or refinance assets.

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, 2021, we had approximately $54.6 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.

As of September 30, 2021, we had long term mortgage indebtedness of approximately $2.4 billion, all of which was incurred by us in connection with the acquisition or refinancing of our real estate properties, as presented in the following table:


		Principal balance as of								Interest only through date (1)
(in thousands)	Acquisition/ refinancing date	September 30, 2021		December 31, 2020		Maturity date	Interest rate		Basis point spread over 1 Month LIBOR

Multifamily communities:
Summit Crossing	10/31/2017	$	36,368	$	36,929	11/1/2024	3.99	%	Fixed rate	—
Summit Crossing II	6/30/2020	20,700		20,700		7/1/2030	2.86	%	278	7/31/2022
Vineyards	9/26/2014	—		32,703		—	—		—	—
Avenues at Cypress	6/30/2020	28,366		28,366		7/1/2027	2.96	%	Fixed rate	7/31/2022
Avenues at Northpointe	6/29/2020	33,546		33,546		7/1/2027	2.79	%	Fixed rate	7/31/2022
Venue at Lakewood Ranch	6/30/2020	36,555		36,555		7/1/2030	2.99	%	Fixed rate	7/31/2022
Aster at Lely Resort	6/29/2020	50,400		50,400		7/1/2030	2.95	%	Fixed rate	7/31/2022
CityPark View	6/25/2020	29,000		29,000		7/1/2030	2.75	%	Fixed rate	7/31/2023
Citi Lakes	7/29/2019	39,736		40,324		8/1/2029	3.66	%	Fixed rate	—
Citi Lakes B-Note	9/24/2021	10,420		—		8/1/2029	3.85	%	Fixed rate	—
Stone Creek	6/22/2017	19,181		19,451		7/1/2052	3.22	%	Fixed rate	—
Lenox Village Town Center	2/28/2019	37,665		38,169		3/1/2029	4.34	%	Fixed rate	—
Retreat at Lenox	12/21/2015	16,467		16,751		1/1/2023	4.04	%	Fixed rate	—
Overton Rise	2/1/2016	36,968		37,607		8/1/2026	3.98	%	Fixed rate	—
Village at Baldwin Park	2/28/2021	68,836		69,608		1/1/2054	3.27	%	Fixed rate	—
Crosstown Walk	6/30/2020	46,500		46,500		7/1/2027	2.92	%	Fixed rate	7/31/2022
525 Avalon Park	6/15/2017	62,270		63,256		7/1/2024	3.98	%	Fixed rate	—
City Vista	7/1/2016	32,366		32,938		7/1/2026	3.68	%	Fixed rate	—
Sorrel	9/24/2021	47,725		30,740		10/1/2028	2.54	%	Fixed rate	—
Citrus Village	7/10/2020	40,900		40,900		8/1/2027	2.95	%	Fixed rate	8/31/2022
Retreat at Greystone	11/21/2017	32,959		33,439		12/1/2024	4.31	%	Fixed rate	—
Founders Village	3/31/2017	29,191		29,635		4/1/2027	4.31	%	Fixed rate	—
Claiborne Crossing	4/26/2017	25,160		25,503		6/1/2054	2.89	%	Fixed rate	—
Luxe at Lakewood Ranch	7/26/2017	36,345		36,922		8/1/2027	3.93	%	Fixed rate	—
Adara at Overland Park	9/27/2017	29,557		30,024		4/1/2028	3.90	%	Fixed rate	—
Aldridge at Town Village	10/31/2017	35,363		35,892		11/1/2024	4.19	%	Fixed rate	—
Reserve at Summit Crossing	9/29/2017	18,590		18,893		10/1/2024	3.87	%	Fixed rate	—


Table continued from previous page		Principal balance as of						Interest only through date (1)
	Acquisition/ refinancing date	September 30, 2021	December 31, 2020	Maturity date	Interest rate		Basis point spread over 1 Month LIBOR
		(in thousands)
Overlook at Crosstown Walk	11/21/2017	20,717	21,038	12/1/2024	3.95	%	Fixed rate	—
Colony at Centerpointe	12/20/2017	30,922	31,445	10/1/2026	3.68	%	Fixed rate	—
Lux at Sorrel	1/9/2018	29,398	29,868	2/1/2030	3.91	%	Fixed rate	—
Green Park	2/28/2018	37,210	37,785	3/10/2028	4.09	%	Fixed rate	—
The Lodge at Hidden River	9/27/2018	39,657	40,204	10/1/2028	4.32	%	Fixed rate	—
Vestavia Reserve	11/9/2018	36,026	36,511	12/1/2030	4.40	%	Fixed rate	—
CityPark View South	11/15/2018	23,074	23,379	6/1/2029	4.51	%	Fixed rate	—
Artisan at Viera	8/8/2019	38,545	39,104	9/1/2029	3.93	%	Fixed rate	—
Five Oaks at Westchase	10/17/2019	30,332	30,818	11/1/2031	3.27	%	Fixed rate	—
Horizon at Wiregrass Ranch	4/23/2020	50,521	51,360	5/1/2030	2.90	%	Fixed rate	—
Parkside at the Beach	4/30/2020	45,037	45,037	5/1/2030	2.95	%	Fixed rate	—
The Blake	11/2/2020	44,435	44,435	5/1/2030	2.82	%	Fixed rate	12/31/2025
The Menlo	12/15/2020	47,000	47,000	1/1/2031	2.68	%	Fixed rate	1/31/2024
The Ellison	8/18/2021	48,000	—	9/1/2027	2.52	%	Fixed rate	9/30/2022
Alleia at Presidio	7/8/2021	35,700	—	8/1/2026	2.50	%	Fixed rate	8/31/2022
The Anson	9/14/2021	56,440	—	10/1/2031	2.69	%	Fixed rate	—
The Kingson	9/16/2021	53,900	—	10/1/2026	2.35	%	Fixed rate	—
Chestnut Farm	9/17/2021	51,800	—	6/17/2022	1.58	%	150	6/17/2022


Total multifamily communities		1,619,848	1,392,735

Grocery-anchored shopping centers:
Spring Hill Plaza	9/17/2019	7,803	7,962	10/1/2031	3.72	%	Fixed rate	—
Parkway Town Centre	9/17/2019	7,710	7,866	10/1/2031	3.72	%	Fixed rate	—
Woodstock Crossing	8/8/2014	—	2,818	—	—		—	—
Deltona Landings	8/16/2019	6,026	6,141	9/1/2029	4.18	%	Fixed rate	—
Powder Springs	8/13/2019	7,593	7,749	9/1/2029	3.65	%	Fixed rate	(2)
Barclay Crossing	8/16/2019	5,972	6,086	9/1/2029	4.18	%	Fixed rate	—
Parkway Centre	8/16/2019	4,340	4,423	9/1/2029	4.18	%	Fixed rate	—
The Market at Salem Cove	10/6/2014	8,745	8,889	11/1/2024	4.21	%	Fixed rate	—
Independence Square	8/27/2015	10,973	11,184	9/1/2022	3.93	%	Fixed rate	—


Table continued from previous page		Principal balance as of							Interest only through date (1)
	Acquisition/ refinancing date	September 30, 2021	December 31, 2020	Maturity date	Interest rate		Basis point spread over 1 Month LIBOR
		(in thousands)

Royal Lakes Marketplace	4/12/2019	9,168	9,345	5/1/2029	4.29	%	Fixed rate		—
The Overlook at Hamilton Place	12/22/2015	18,760	19,088	1/1/2026	4.19	%	Fixed rate		—
Summit Point	10/30/2015	10,826	11,118	11/1/2022	3.57	%	Fixed rate		—
East Gate Shopping Center	4/29/2016	4,994	5,118	5/1/2026	3.97	%	Fixed rate		—
Fury's Ferry	4/29/2016	5,769	5,912	5/1/2026	3.97	%	Fixed rate		—
Rosewood Shopping Center	4/29/2016	3,875	3,971	5/1/2026	3.97	%	Fixed rate		—
Southgate Village	4/29/2016	6,888	7,059	5/1/2026	3.97	%	Fixed rate		—
The Market at Victory Village	5/16/2016	8,625	8,751	9/11/2024	4.40	%	Fixed rate		—
Wade Green Village	4/7/2016	7,359	7,488	5/1/2026	4.00	%	Fixed rate		—
Lakeland Plaza	7/15/2016	25,990	26,632	8/1/2026	3.85	%	Fixed rate		—
University Palms	8/8/2016	11,729	12,030	9/1/2026	3.45	%	Fixed rate		—
Cherokee Plaza	4/12/2019	23,817	24,277	5/1/2027	4.28	%	Fixed rate		—
Sandy Plains Exchange	8/8/2016	8,193	8,404	9/1/2026	3.45	%	Fixed rate		—
Thompson Bridge Commons	8/8/2016	10,953	11,234	9/1/2026	3.45	%	Fixed rate		—
Heritage Station	8/8/2016	8,107	8,315	9/1/2026	3.45	%	Fixed rate		—
Oak Park Village	8/8/2016	8,365	8,580	9/1/2026	3.45	%	Fixed rate		—
Shoppes of Parkland	8/8/2016	15,189	15,414	9/1/2023	4.67	%	Fixed rate		—
Champions Village	10/18/2016	27,400	27,400	11/1/2021	3.25	%	300	(3)	11/1/2021
Castleberry-Southard	4/21/2017	10,559	10,734	5/1/2027	3.99	%	Fixed rate		—
Rockbridge Village	6/6/2017	13,087	13,310	7/5/2027	3.73	%	Fixed rate		—
Irmo Station	7/26/2017	9,541	9,758	8/1/2030	3.94	%	Fixed rate		—
Maynard Crossing	8/25/2017	16,569	16,953	9/1/2032	3.74	%	Fixed rate		—
Woodmont Village	9/8/2017	7,922	8,096	10/1/2027	4.13	%	Fixed rate		—
West Town Market	9/22/2017	8,071	8,260	10/1/2025	3.65	%	Fixed rate		—
Crossroads Market	12/5/2017	17,241	17,622	1/1/2030	3.95	%	Fixed rate		—
Anderson Central	3/16/2018	11,018	11,246	4/1/2028	4.32	%	Fixed rate		—
Greensboro Village	5/22/2018	7,876	8,040	6/1/2028	4.20	%	Fixed rate		—
Governors Towne Square	5/22/2018	10,479	10,696	6/1/2028	4.20	%	Fixed rate		—
Conway Plaza	6/29/2018	9,239	9,375	7/5/2028	4.29	%	Fixed rate		—
Brawley Commons	7/6/2018	17,173	17,519	8/1/2028	4.36	%	Fixed rate		—
Hollymead Town Center	12/21/2018	25,656	26,139	1/1/2029	4.64	%	Fixed rate		—
Gayton Crossing	1/17/2019	16,962	17,276	2/1/2029	4.71	%	Fixed rate		—
Free State Shopping Center	5/28/2019	44,895	45,549	6/1/2029	3.99	%	Fixed rate		—
Polo Grounds Mall	6/12/2019	12,798	12,986	7/1/2034	3.93	%	Fixed rate		—
Disston Plaza	6/12/2019	17,325	17,578	7/1/2034	3.93	%	Fixed rate		—
Fairfield Shopping Center	8/16/2019	19,750	19,750	8/16/2026	2.14	%	205		8/16/2022


Table continued from previous page		Principal balance as of
	Acquisition/ refinancing date	September 30, 2021		December 31, 2020		Maturity date	Interest rate		Basis point spread over 1 Month LIBOR	Interest only through date (1)
		(in thousands)		(in thousands)

Berry Town Center	11/14/2019	11,615		11,794		12/1/2034	3.49	%	Fixed rate	—
Hanover Shopping Center	12/19/2019	30,610		31,217		12/19/2026	3.62	%	Fixed rate	—
Wakefield Crossing	1/29/2020	7,576		7,728		2/1/2032	3.66	%	Fixed rate	—
Midway Market	4/15/2021	10,059		—		5/1/2031	3.06	%	Fixed rate	—

Total grocery-anchored shopping centers (4)		611,190		614,880


Office buildings:
Brookwood Center	8/29/2016	29,310		29,925		9/10/2031	3.52	%	Fixed rate	—
Galleria 75	11/4/2016	—		5,131		—	—		—	—
Three Ravinia	12/30/2016	115,500		115,500		1/1/2042	4.46	%	Fixed rate	1/31/2022
Westridge at La Cantera	11/13/2017	49,373		50,449		12/10/2028	4.10	%	Fixed rate	—
Armour Yards	1/29/2018	—		39,425		—	—		—	—
150 Fayetteville	7/31/2018	—		113,768		—	—		—	—
Capitol Towers	12/20/2018	—		122,720		—	—		—	—
CAPTRUST Tower	7/25/2019	—		82,650		—	—		—	7/31/2029
Morrocroft Centre	3/19/2020	—		70,000		—	—		—	4/10/2025
251 Armour Yards	1/22/2020	—		3,522		—	—		—	1/21/2023

Total office buildings		194,183		633,090
Grand total		2,425,221		2,640,705
Less: deferred loan costs		(36,720)		(42,233)
Less: below market debt adjustment		(3,918)		(4,008)
Mortgage notes, net		$	2,384,583	$	2,594,464

Footnotes to Mortgage Notes Table

(1) Following the indicated interest only period (where applicable), monthly payments of accrued interest and principal are based on a 25 to 35-year amortization period through the maturity date.

(2) The mortgage has interest-only payment terms for the periods of June 1, 2023 through May 1, 2024 and from June 1, 2028 through May 1, 2029.

(3) The interest rate has a floor of 3.25%.

(4) Excludes mortgage debt on the Neapolitan Way grocery-anchored shopping center, which is held in an unconsolidated joint venture.

Contractual Obligations

As of September 30, 2021, our contractual obligations consisted of the mortgage notes secured by our acquired properties and the Revolving Credit Facility. Based on a LIBOR rate of 0.08% at September 30, 2021, 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
Principal payments:
Mortgage debt	$	2,425,221	$	130,931	$	211,901	$	590,749	$	1,491,640
Line of credit	—		—		—		—		—
Total principal	$	2,425,221	$	130,931	$	211,901	$	590,749	$	1,491,640
Interest payments:
Mortgage debt	$	614,244	$	84,368	$	159,002	$	138,053	$	232,821
Line of credit	—		—		—		—		—

Total interest	$	614,244	$	84,368	$	159,002	$	138,053	$	232,821

In addition, we had unfunded real estate loan balances totaling approximately $52.5 million at September 30, 2021.

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, 2021, 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

Summit Crossing II	$	20,700			2.5	%	5.3	%
Total capped floating-rate debt	20,700		0.85	%

Champions Village	27,400				—		—
Fairfield Shopping Center	19,750				—		—
Chestnut Farm	51,800				—		—
Total uncapped floating-rate debt	98,950		4.08	%

Total floating-rate debt	$	119,650	4.93	%

Our Revolving Line of Credit accrued interest at a spread of 3.5% over LIBOR as of September 30, 2021; 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 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, 2021, would increase by approximately $821,000 or decrease by approximately $63,000 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, 2021, 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, 2021 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 is currently subject to any legal proceedings that we consider to be material. To our knowledge, none of our properties are currently subject to any legal proceeding that we consider material.

Item 1A. Risk Factors

A description of certain factors that may affect our future results and risk factors is set forth in our Annual Report on Form 10-K for the year ended December 31, 2020. As of September 30, 2021, there have been no material changes in our risk factors from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2020.

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

Information Security

Board and Committee Oversight

The Company takes risks related to information security seriously. The Company’s Board of Directors has designated its Nominating and Corporate Governance Committee responsible for information security and this committee is made up entirely of independent directors. While no member of this committee has information security experience, the Company is bringing educational opportunities to the committee members to give them information and training related to their oversight role. Management has formed an internal Security Committee that reports at least semi-annually to the Nominating and Corporate Governance Committee and/or the full Board on the Company’s cybersecurity risks and mitigation efforts. The role

of the Security Committee is to oversee cyber risk assessments, monitor applicable key risk indicators, review cybersecurity training procedures, created oversee our cybersecurity incident response plans and engage third parties to conduct periodic audits and penetration testing. The most recent presentation from the Security Committee occurred at the Company’s quarterly Board meeting on August 5, 2021.

Insurance

The Company has in place an industry standard cyber security insurance policy with Brit Insurance. This policy provides for some coverage for cyber risks arising out of data and network breaches, third party related breaches, and phishing attacks, data manipulation and potential business interruptions, subject to policy limits and per occurrence deductibles.

Incidents and Responses

During the past three years the Company has no material information security breaches. The Company has not had any expenses related to security breaches, security breach penalties or settlements in the past three years.

Training and Audits

In 2021 the Company completed a full third-party audit of its cyber security readiness using the National Institute of Technology (NIST) Cyber Security Framework. The Company is reviewing the results of this audit and is in the process of preparing responses to the recommendations. As part of the response to these recommendations, the Company has assembled a nine-course training program with Brit. This training program will be rolled out in the near future to all employees as the part of a planned cyber security awareness month at the Company. This training program is required for all current employees and will be required for all new hires.

Third Party Reporting

The Company received a score of 748 in its first ISS Cyber Risk Score Report dated October 13, 2021. The range of ISS Cyber Risk Scores is similar to an individual’s credit score with a range of 300 to 850. In addition to its initial score, the Company ranked first in its peer group in four of the five categories rated in the Score Report.

According to Institutional Shareholder Services, or ISS, the ISS Cyber Risk Score of an organization represents the probabilistic likelihood of a significant cyber incident at the organization in the following twelve months. ISS relies on a supervised machine learning model to develop this score. The model is trained to recognize the historical cyber security symptoms at organizations that did not have similar negative cyber security incidents. This report focuses on presenting the ISS Cyber Risk Score for an organization, as well as a concise presentation of key data measurements and trends. Taken together, these can help organizations to understand the cyber security context at an organization which is being captured by the score. This report also includes comparison metrics that allow the data to be compared to a benchmark peer group. This helps to provide a better understanding of similar measurements and data metrics for a group of peers and their resulting Cyber Risk Scores.

Item 6. Exhibits

See Exhibit Index.


EXHIBIT INDEX
Exhibit Number		Description
3.1		Articles of Amendment and Restatement of Preferred Apartment Communities, Inc. (Incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2021).
3.2		Fifth Amended and Restated By-laws of Preferred Apartment Communities, Inc. (Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 19, 2020).
10.1	+	Separation Agreement dated July 15, 2021 by and between Preferred Apartment Advisors, LLC, a subsidiary of the Company and Parker Boone DuPree (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on July 19, 2021).
31.1	*	Certification of 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.INS	*	Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	*	Inline XBRL Taxonomy Extension Schema Document
101.CAL	*	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	*	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	*	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	*	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	*	Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.

	*	Filed or Furnished herewith
	+	Management contract or compensatory plan, contract or arrangement

SIGNATURES

Pursuant to the requirements 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 8, 2021

By:

/s/ Joel T. Murphy

Joel T. Murphy

Chief Executive Officer

(Principal Executive Officer)

Date: November 8, 2021

By:

/s/ John A. Isakson

John A. Isakson

Chief Financial Officer

(Principal Financial Officer)

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Preferred Apartment Communities (APTS) 10-Q2021 Q3 Quarterly report

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