Preferred Apartment Communities Inc.
Annual Report 2018

Plain-text annual report

COMPANY OVERVIEW LETTER TO STOCKHOLDERS PORTFOLIO HIGHLIGHTS FORM 10-K COMPANY INFORMATION 03 05 13 26 58 01 PREF ERRED APARTMENT C OMM UN ITI ES Preferred Apartment Communities, Inc. (NYSE: APTS) is a Maryland corporation formed primarily to own and operate multifamily properties and, to a lesser extent, own and operate student housing properties, grocery-anchored shopping centers and strategically located, well leased Class A office buildings, all in select targeted markets throughout the United States. As part of our business strategy, we may enter into forward purchase contracts or purchase options for to-be-built multifamily communities and we may make real estate related loans, provide deposit arrangements, or provide performance assurances, as may be necessary or appropriate, in connection with the development of multifamily communities. As a secondary strategy, we may acquire or originate senior mortgage loans, subordinate loans or real estate loans secured by interests in multifamily properties, membership related assets and or partnership interests in multifamily properties and other multifamily invest a lesser portion of our assets in other real estate related investments, including other income-producing property types, senior mortgage loans, subordinate loans or real estate loans secured by interests in other income-producing property types, membership or partnership interests in other income-producing property types as determined by our manager as appropriate for us. On December 31, 2018, the Company was the approximate 97.9% owner of Preferred Apartment Communities Operating Partnership, L.P., the Company’s operating partnership. Preferred Apartment Communities, Inc. has elected to be taxed as a real estate investment trust under the Internal Revenue Code of 1986, as amended, commencing with its tax year ended December 31, 2011. Learn more at www.pacapts.com. MSCI 02 2 011 THE YEAR OF THE IPO STARTED YEAR WITH ZERO ASSOCIATES • ZERO REAL ESTATE ASSETS • ZERO REVENUES ENDED YEAR WITH $92 MILLION TOTAL ASSETS $7 MILLION REVENUES 3 MULTIFAMILY ASSETS 3 MARKETS 2012 THE YEAR OF GROWTH 2013 THE YEAR OF PAVING THE PATH 2014 THE YEAR OF ACHIEVING GOALS 2015 THE YEAR OF TRANSITIONING TO NYSE FROM NYSE/MKT 2016 THE YEAR OF 5 YEARS OF SUCCESS 2017 THE YEAR OF OUR WINNING CULTURE 2 018 THE YEAR OF SOARING HIGHER ENDED YEAR WITH $4.4 BILLION TOTAL ASSETS $397 MILLION REVENUES 32 MULTIFAMILY ASSETS 7 STUDENT HOUSING ASSETS 45 GROCERY-ANCHORED SHOPPING CENTERS 7 OFFICE PROPERTIES 35 MARKETS 03 AS OF DECEMBER 31, 2018, OUR ASSETS GREW TO $4.4 BILLION AND REVENUES SOARED TO $397 MILLION With assets in 35 MARKETS across 14 STATES, the PAC family of companies provides the full gamut of services for our core business, including INVESTMENT MANAGEMENT, ACQUISITION and DISPOSITION, ASSET MANAGEMENT and PROPERTY LEVEL MANAGEMENT. Our guiding philosophy is to provide our residents and tenants with an EXCEPTIONAL EXPERIENCE by offering HIGH QUALITY APARTMENT HOMES, STUDENT HOUSING, GROCERY- ANCHORED SHOPPING CENTERS and OFFICE PROPERTIES, superior resident and tenant services and total customer satisfaction. MULTIFAMILY STUDENT HOUSING REAL ESTATE LOAN INVESTMENTS GROCERY-ANCHORED SHOPPING CENTERS OFFICE PROPERTIES 04 L E NOX VI LL AG E TOW N C EN TE R | NAS HV I LLE , T N MU LTI FAMILY TO OU R S TOC KHOLDERS This year’s Annual Report cover conveys the essence of our company. Preferred Apartment Communities (PAC) is unique in significant ways and these differences have driven the success we have achieved since we formed the company and continue to drive the performance that our stockholders have come to expect. THERE ARE TWO PRIMARY DIFFERENTIATORS: 1. HOW WE RAISE CAPITAL 2. HOW WE INVEST CAPITAL Our strategically-designed capital raising program allows us to access capital by selling preferred stock through the broker-dealer and registered investment advisor channels while maintaining our access to the public market through the sale of our common stock. A key benefit of this duality is the consistency of capital availability, which led to our significant growth in 2018. To illustrate this, the chart on the right contrasts the steadiness of our preferred stock sales with the volatility of the MSCI US REIT Index (RMZ). This consistency of capital availability allows us to commit to transactions and to investments in our properties well in advance, which provides us with a critical advantage especially in a tight investment market. PREFERRED STOCK RAISED VS. MSCI US REIT INDEX In 2018, we sold through our managing dealer, Preferred Capital Securities, LLC, 423,781 units of our Series A Redeemable Preferred Stock and 28,951 shares of our Series M Redeemable Preferred Stock, raising almost $450 million in capital, the net proceeds of which were used for investment and other capital purposes. 05 At the same time, we increased our common shares outstanding as of the end of 2018 to 41.8 million shares, representing an 8.3% increase compared to the end of 2017. As we enter 2019, we expect to continue to raise capital as needed through sales of our preferred stock and common stock, and from sales of selected assets. The second way PAC differentiates itself is how we invest the capital we have raised. From the outset, we have always wanted to create maximum value in our investments, and we initially explored doing that through development—after all, our senior team is steeped in development experience. Ultimately, we settled on a plan to originate real estate loan investments, sometimes called mezzanine loans, that would allow us to participate in the value creation of development but with less risk and with a return on our invested capital during the development process. Our real estate loan investments are designed to fill the developers’ capital stack between the senior loan and the equity. The cost of these loans to the developers comes in two forms: first, in the form of interest; and second, in the form of a purchase option discount to PAC at project stabilization. In structuring these loans, our goal is to seek an IRR between 14-16%. PAC ASSETS Additionally, we invest the capital we raise into a diversified portfolio. We realize that a “pure play,” single-asset class portfolio may be preferred by some, but our capital raising strategy and breadth of experience causes us to look on this differently. Although PAC remains focused on owning and managing multifamily communities, if we restricted PAC to invest only in multifamily assets at a time when cap rates are compressed (as they are now), then we could be lured into investing in higher risk assets to maintain yield or lower yielding assets to maintain quality. One of our core principles is that, first and foremost, we are real estate owners and operators. We take great pride in the depth and breadth of experience of our management team. This experience has allowed us to successfully diversify into student housing, grocery-anchored shopping centers, and Class A office properties. Our objective is to manage the relative cap rates of our acquisitions against expected cash flow in an effort to drive long-term stockholder value and to produce a compelling projected IRR over time. Generally, real estate is underwritten as a longer hold investment, which we seek to balance with our public company requirement of reporting financials on a quarterly basis. In all, these strategic differentiators allow us to focus on how we can pay our stockholders more, not on how we can get our stockholders to accept less. Through December 31, 2018, we are pleased to report that PAC has provided our holders of common stock a robust approximate 16.7% average annual return, assuming an investment in our common stock in our April 2011 initial public offering, the reinvestment of all dividends, and no transaction costs. 06 S TAD IU M V IL L AGE | ATL AN TA , GA S TUDE NT HOUS ING OP ERATION AL RESULT S & C AP ITAL MARKET S ACTIVITIES As a diversified company, our operating results reflect the performance of our multifamily communities, including student housing, our office properties, and our grocery-anchored shopping centers. These operating results also reflect the performance of our real estate loan investments originated primarily to third party developers of multifamily communities. During 2018, we substantially increased our consolidated assets by $1.16 billion to approximately $4.4 billion or 35.6% compared to 2017. Consolidated revenues from our four business divisions, together with our real estate loan investment program, was approximately $397.3 million, representing a 35.1% increase compared to 2017. Geographically, we now own assets in 35 markets across 14 states, primarily in the Southeast, Mid-Atlantic and Texas. FFO PAYOUT RATIO 73% COMMON STOCK AND 60% PREFERRED STOCK 07 Our cash flow from operations for 2018 was approximately $145.4 million, a 68.4% increase compared to 2017. As a result, our Funds From Operations (FFO) payout ratio to our common stockholders and unitholders for 2018 was approximately 73% and to 29 LOANS AGGREGATING $501 MILLION IN COMMITMENTS our preferred stockholders was approximately 60%, reflecting our continued focus on covering our dividends from operations.1 Based on publicly available information, we believe the FFO payout ratio to our preferred stockholders remains the lowest for securities sold through the independent broker-dealer and registered investment advisor channels. AS OF THE END OF 2018, WE HAD 41,775,855 SHARES OF COMMON STOCK ISSUED & OUTSTANDING 2018 ASSET SALES PRODUCED A GAAP GAIN OF APPROXIMATELY $69.6 MILLION We remain committed to having the youngest multifamily portfolio in our industry. In 2018, for example, we sold four of our oldest communities for approximately $171 million in aggregate gross proceeds, resulting in a GAAP gain of approximately $69.6 million and a reduction in the average age of our portfolio to 4.3 years. Our real estate loan investment program also continued its strategic and financial successes during 2018 and remains a driver of our continued multifamily growth activities. As of the end of 2018, this program included a total of 29 loans aggregating $501 million in commitments, of which $336.3 million had been deployed. This represents a pipeline of over $817.5 million of multifamily communities for which we typically receive an option to acquire the community following completion and stabilization at a discount to the then fair market value. During 2018, we earned approximately $59.3 million through this program. Since the commencement of our real estate loan investment program in 2011, we have had 28 loans mature aggregating $138.7 million in earnings. 08 THREE RAVINIA | ATL A NTA , GA OFFI CE EN VIRONM ENTAL , SOCIAL & GOV ERN AN CE ISSUES GENERAL In 2018, we formed a Sustainability Committee focused on driving initiatives to integrate environmental, social and governance (ESG) policies with respect to our core business, training, community service projects, associate wellness programs, environmental data management and continued corporate governance policies. including associate ENVIRONMENTAL We continue to make great strides in advancing energy saving efforts throughout our company. We are proud to report that 88% of our office portfolio is Leadership in Energy and Environmental Design (LEED) certified or Energy Star rated. In addition to active recycling programs at virtually all of our multifamily communities, we have completed full common area LED lighting retrofits as of the end of 2018 at 28% of our communities. As of the end of 2018, approximately 34% of our grocery-anchored shopping center portfolio has been retrofitted to include LED parking lot lighting. We are continuing these LED retrofits throughout the remainder of our multifamily, student housing, grocery-anchored shopping center, and office portfolios. In addition to ongoing energy efficiency efforts at our properties, we also are participating in Fannie Mae’s and HUD’s “green” initiative programs at several of our multifamily communities, which help lower our overall cost of financing of those assets. We will continue to seek these type of opportunities in our financing efforts. SOCIAL We have always emphasized that the success of our company is largely due to the diversity, depth, quality and experience of our executive management team and our associates. Hiring great associates, however, is just part of the equation. Several years ago we instituted our Soaring 09 WE TRAIN OUR EXECUTIVE MANAGEMENT AND LEADERSHIP TEAM TO BE ABLE TO ASSUME ADDITIONAL RESPONSIBILITIES WHEN OPPORTUNITIES PRESENT THEMSELVES. 111 GRADUATES FROM THE SOARING SERIES SINCE PROGRAM INCEPTION 18 EAGLE CLUB WINNERS IN 2018 RECOGNIZED FOR THEIR UNIQUE ACHIEVEMENTS OUR HEALTH AND WELLNESS PROGRAM Series as educational training programs to help our executive management and leadership team strengthen their management skills, build camaraderie and institutionalize our culture, and to assist junior associates in understanding and implementing management-level responsibilities. To date, we have graduated 111 associates from these training programs. We also emphasize recognizing our associates for their achievements and rewarding them for their successes. At our PAC Awards Banquet held annually in Atlanta, for example, we recognize not only outstanding associates but also outstanding properties and teams. In particular, we identify a select group of associates who have demonstrated outstanding achievements during the year with our Eagle Club award. We also initiated at last December’s Awards Banquet a new award presented to the associate who best exemplifies and demonstrates the mission, vision and values set forth by John A. Williams, our co-founder, CEO and Chairman of the Board, who passed away last April. Starting Preferred Apartment Communities from scratch in 2011 has allowed us to create a positive culture unique to our company. Culture, though, includes more than just our goals, values, expectations, and how our associates communicate with one another and with our residents and tenants. We have focused on the health and well-being of our associates by organizing a PAC Gets Fit program to encourage a healthy lifestyle, and designing our Eagle’s Perch, a café-style environment, to promote increased social interactions among our associates. The success of these efforts is reflected in Preferred Apartment Communities’ recognition as one of the Top Places to Work in Atlanta for 2018 by the Atlanta Journal-Constitution for the second year 10 NEAPOLITAN WAY | NA P L E S , FL GROCERY- ANC HO RED RECOGNIZED AS ONE OF THE TOP PLACES TO WORK IN ATLANTA 2 YEARS IN A ROW CONTINUING TO EMPHASIZE CULTURE OF GIVING BACK AS THE HEARTBEAT OF OUR COMPANY in a row, and receiving a 2018 National Top 10 Annual Resident Satisfaction Company Award for the third consecutive year. Our PAC Gives Back community philanthropic initiative has been a resounding achievement both for our associates and the communities where we conduct business. For the past two years, PAC has participated in the Annual Atlanta Food-A-Thon sponsored by the Atlanta Apartment Association. In that short time, our associates have donated over 1 million food item equivalents to the Atlanta Community Food Bank. We treasure both what we have created and what we are creating, and will continue to emphasize culture and giving back as the heartbeat of our company. GOVERNANCE In 2018, in response to recommendations of our stockholders, our Board of Directors amended PAC’s Bylaws to provide for majority voting in uncontested elections of directors. We also implemented an anonymous fraud hotline in an effort to maintain the highest level of integrity and ethical standards. 11 STARTING A COMPANY FROM SCRATCH IN 2011 HAS ALLOWED US TO CREATE A POSITIVE CULTURE UNIQUE TO OUR COMPANY. WE TREASURE BOTH WHAT WE HAVE CREATED AND WHAT WE ARE CREATING IN CLOSIN G In 2018, we saw the growth and maturation of Preferred Apartment Communities. The year ahead promises new challenges and opportunities. Our successes as an organization are the result of the efforts and dedication of many people, including our extraordinary associates, residents and tenants, to whom we express our sincere appreciation. Most importantly, we also wish to thank you, our stockholders, for your continued trust, confidence and support. Daniel M. DuPree Leonard A. Silverstein 1 See our Annual Report on Form 10-K included herein for a reconciliation of FFO to comparable GAAP measures. 12 MULTIFAMILY OWNED & OPERATED 32 ASSETS 9,768 UNITS 10 STATES 16 MARKETS 13 Preferred Apartment Communities is first and foremost a multifamily focused company. We acquire newly constructed high-quality assets located in markets that have strong fundamentals, diverse economic drivers and long-term growth prospects. Once a community has been purchased, our property management division operates the property in a manner that seeks to ensure excellent resident satisfaction while also taking action to drive net operating income, thus enhancing both the value of our property and brand. Looking ahead, we remain committed to acquiring best-in-class real estate and providing the highest standard of service. AVERAGE INTEREST RATE AT YEAR-END 3.9% AND TERM REMAINING OF 9.28 YEARS SOLD 4 ASSETS, OR 1,100 UNITS, FOR A GAAP GAIN OF APPROXIMATELY $69.6 MILLION ACQUIRED 5 “CLASS A” MULTIFAMILY COMMUNITIES REPRESENTING $261 MILLION OF CAPITAL INVESTMENT AND OVER 1,300 UNITS 14 STUDENT HOUSING OWNED & OPERATED 7 ASSETS 5,208 BEDS 4 STATES 7 UNIVERSITIES 15 Preferred Campus Communities is a subset of our core Class A multifamily community focus. We acquire off-campus student housing communities located near top tier universities across the United States with growing enrollments. Preferred Campus Communities’ acquisition strategy is to target assets that are highly ammenitized and that have built-in, high-tech features which meet the fast paced demands of student life. Our portfolio provides each resident with his or her own modern living experience in a prime location that is quickly accessible to campus with an unparalleled five-star level of customer service. GREW OUR PORTFOLIO BY 2,258 BEDS OR 77% YEAR-OVER-YEAR AVERAGE ASSET AGE IS 3.6 YEARS AVERAGE PHYSICAL OCCUPANCY OF 95% FOR FALL 2018 ACQUIRED 3 ASSETS IN 2018 BRINGING THE TOTAL PORTFOLIO TO 7 ASSETS 16 GROCERY-ANCHORED SHOPPING CENTERS OWNED & OPERATED 45 GROCERY-ANCHORED SHOPPING CENTERS 4,730,695 SQUARE FEET 8 STATES 19 MARKETS 17 New Market Properties is a wholly-owned indirect subsidiary of PAC, exclusively dedicated to advancing the grocery-anchored, necessity based retail strategy of Preferred Apartment Communities. New Market’s leadership team has extensive experience in the retail sector and deep retail industry relationships. New Market acquires, owns and operates grocery-anchored necessity based centers in quality suburban markets in the Mid-Atlantic, Southeast and throughout Texas. We target centers that have market dominant grocery- anchors holding significant market share in that particular submarket with high and growing sales volume stores. By way of example, 23 of our centers are anchored by Publix, 8 are anchored by Kroger, and 4 are anchored by Harris Teeter. ACQUIRED 6 GROCERY-ANCHORED CENTERS TOTALING APPROXIMATELY $163 MILLION OF TOTAL CAPITAL INVESTMENT EXECUTED ON PORTFOLIO- WIDE LEASING GOALS AND PROJECT VALUE CREATION INITIATIVES ENTERED OUR 8TH STATE, VIRGINIA, AND 19TH MARKET 18 OFFICE PROPERTIES OWNED & OPERATED 7 CLASS A OFFICE ASSETS TOTALING 2.6 MILLION SQUARE FEET ACROSS THE SOUTHEAST & TEXAS 19 Preferred Office Properties is a wholly-owned indirect subsidiary of PAC whose strategy is to invest in well located, high quality office properties. We source these investments through the purchase of stabilized operating assets as well as by making opportunistic investments in ground-up office development where we seek to be long-term property owners. Our stabilized property acquisitions provide predictable earnings while our investments in new development offer strategic opportunities for entry into top submarkets where near-term acquisition opportunities may be limited, while at the same time seeking to deliver highly accretive returns. We believe this strategy on a blended basis provides a compelling risk/reward as we grow our portfolio. CLOSED PRINCIPAL ACQUISITIONS AND DEVELOPMENT FINANCING INVESTMENTS TOTALING MORE THAN $500 MILLION IN AGGREGATE VALUE, INCLUDING FIRST OFFICE DEVELOPMENT LOAN GREW OFFICE PORTFOLIO TO APPROXIMATELY 2.6 MILLION SQUARE FEET OUTPERFORMED INVESTMENT UNDERWRITING AND BUDGET NOI ACROSS THE PORTFOLIO 20 REAL ESTATE LOAN INVESTMENT PROGRAM 19 PROJECTS TOTALING: 4,101 MULTIFAMILY UNITS 2,782 STUDENT HOUSING BEDS 195,000 RETAIL SQUARE FEET 187,000 OFFICE SQUARE FEET 21 21 One of the ways we have revolutionized the multifamily industry is through our real estate loan investment program, which provides a portion of the capital needed to construct a new community. Under this program, we originate loans to select multifamily developers who have proven track records of delivering the type of Class A quality product we seek to own. We also review and approve the sites where the new communities will be located as well as development plans and specifications. Finally, we typically manage the lease-up of the new community to instill PAC’s philosophy of best-in-class customer service, safety and security. Our innovative loan investment program provides us the opportunity to earn an accretive return during the development process, to monitor and control the quality of the product being built, and to purchase the finished community at a discount, creating value for both our company and stockholders. OVER $500 MILLION OF COMMITMENTS PURCHASED 5 COMMUNITIES CONSISTING OF 810 MULTIFAMILY UNITS AND 1,364 STUDENT HOUSING BEDS UNDER OUR LOAN INVESTMENT PROGRAM ORIGINATED 8 PROJECTS WITH COMMITMENTS TOTALING MORE THAN $293 MILLION 2222 Preferred Apartment Advisors is the operating arm of Preferred Apartment Communities and is responsible for the overall operations and management of our company. 23 Preferred Residential Management is a subsidiary of Preferred Apartment Advisors, LLC, the external manager for Preferred Apartment Communities, Inc. PRM manages PAC’s multifamily communities throughout the United States. Its goal is to provide residents an exceptional living experience by offering quality apartment homes, superior resident services and total satisfaction. From providing cutting-edge resident experiences, meticulously groomed landscaping and superior maintenance services to its well-trained staff, PRM is committed to creating a higher standard of living that sets our communities apart from all others. Preferred Campus Management is a subsidiary of Preferred Apartment Advisors, LLC. PCM is a student housing management company that provides turn-key property management services to student housing communities acquired by PAC. It also provides similar services to third party developers of student housing communities utilizing PAC’s loan investment program. PCM’s goal is to provide residents an extraordinary living experience through superior resident services, a committed management team and a well-maintained physical environment. Preferred Campus Communities is a wholly–owned indirect subsidiary of Preferred Apartment Communities, Inc. PCC was formed to acquire off-campus student communities in select targeted university markets with growing enrollments throughout the United States. New Market Properties is a wholly-owned indirect subsidiary of Preferred Apartment Communities, Inc. and is focused on the grocery-anchored, necessity based shopping center sector. New Market currently owns and operates a portfolio of grocery-anchored shopping centers in eight Sunbelt states. Its strategy is to prudently grow its existing portfolio throughout the Mid-Atlantic, the Southeast and Texas. New Market targets high-quality suburban markets with dominant grocers such as Publix, Kroger and Harris Teeter. Preferred Office Properties is a wholly–owned indirect subsidiary of Preferred Apartment Communities, Inc. formed to invest in Class A office properties across the United States. POP sources portfolio assets through acquisitions of operating properties as well as strategic, structured participation in new development. Preferred Capital Securities is an affiliated investment banking firm focused on the wholesale distribution of real-estate based securities offerings to broker-dealers and registered investment advisors across the United States. PCS is the distribution platform for Preferred Apartment Communities' preferred stock offerings. PCS is a registered Broker Dealer in all 50 states and a member of the Financial Industry Regulatory Authority (FINRA) and the Security Investment Protection Corporation (SIPC). 24 “WORK HARD, HAVE FUN & BE MORE THAN FAIR.” IN MEMORY OF JOHN WILLIAMS 1943 – 2018 John A. Williams, an icon in the real estate industry and our founding CEO & Chairman of the Board passed away suddenly last April at age 75 following a brief illness. John was an iconic businessman, visionary, entrepreneur, and leader. He founded Post Properties, his first multifamily company, in 1970 and listed it on the NYSE in 1993. John set the standard for high quality residential apartment home development, transforming the apartment industry and cityscapes across the country. He continued this standard of excellence with the creation of Preferred Apartment Communities. The Board of Directors and our entire company are indebted to John for his strong leadership, real estate vision, incredible work ethic, outgoing personality, and boundless energy. These traits are imbedded in PAC where we will continue to honor his legacy. 25 UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-KxxANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2018Commission File No. 001-34995Preferred Apartment Communities, Inc.(Exact name of registrant as specified in its charter) MARYLAND27-1712193(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) 818-4100Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, par value $.01 per shareNYSESecurities registered pursuant to Section 12(g) of the Act:Title of each classSeries A Redeemable Preferred Stock, par value $0.01 per shareWarrant to Purchase Common Stock, par value $0.01 per shareSeries M Redeemable Preferred Stock, par value $0.01 per shareIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate 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 preceding12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§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 x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant'sknowledge, in definitive proxy or information statements incorporated by reference in PART III of this Form 10-K or any amendment to this Form 10-K. ¨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 growthcompany (as defined in Exchange Act Rule 12b-2).Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨ Emerging growth company ¨If an emerging growth company, indicate by check mark if the filer has elected not to use the extended transition period for complying with any new or revised financialaccounting 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 Exchange Act Rule 12b-2). Yes ¨ No xThe aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 29, 2018, the last business day of the registrant's mostrecently completed second fiscal quarter, was $663,613,344 based on the closing price of the common stock on the NYSE on such date. The number of shares outstanding of theregistrant’s Common Stock, as of February 22, 2019 was 42,901,894.DOCUMENTS INCORPORATED BY REFERENCECertain information to be included in the registrant's definitive Proxy Statement, to be filed not later than 120 days after the end of the fiscal year covered by this Annual Reporton Form 10-K, for the registrant's 2019 Annual Meeting of Stockholders is incorporated by reference into PART III of this Annual Report on Form 10-K.Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. TABLE OF CONTENTS FINANCIAL INFORMATIONPage No. PART I 1. Business1 1A. Risk Factors5 1B. Unresolved Staff Comments36 2. Properties37 3. Legal Proceedings42 4. Mine Safety Disclosures42 PART II 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchasesof Equity Securities42 6. Selected Financial Data44 7. Management's Discussion and Analysis of Financial Condition and Results of Operations44 7A. Quantitative and Qualitative Disclosures about Market Risk77 8. Financial Statements and Supplementary Data78 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure78 9A. Controls and Procedures78 9B. Other Information79 PART III 10. Directors, Executive Officers and Corporate Governance79 11. Executive Compensation79 12. Security Ownership of Certain Beneficial Owners and Management and Related StockholderMatters79 13. Certain Relationships and Related Transactions, and Director Independence79 14. Principal Accountant Fees and Services80 PART IV 15. Exhibits and Financial Statement Schedules80 16. Form 10-K Summary132Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.PART IThis Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, asamended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our actual results could differmaterially from those set forth in each forward-looking statement. Certain factors that might cause such a difference are discussed in this report, including inthe section entitled “Forward-Looking Statements” included elsewhere in this Annual Report on Form 10-K. You should also review the section entitled"Risk Factors" in Item 1A of this Annual Report on Form 10-K for a discussion of various risks that could adversely affect us. Unless the context otherwiserequires or indicates, references to the "Company", "we", "our" or "us" refers to Preferred Apartment Communities, Inc., a Maryland corporation, together withits consolidated subsidiaries, including Preferred Apartment Communities Operating Partnership, L.P., or our Operating Partnership.Item 1.BusinessDevelopment of the CompanyPreferred Apartment Communities, Inc. was formed as a Maryland corporation on September 18, 2009 and has elected to be taxed as a real estateinvestment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code, effective with its tax year ended December 31, 2011. TheCompany was formed primarily to own and operate multifamily properties and, to a lesser extent, own and operate student housing properties, groceryanchored shopping centers and strategically located, well leased class A office buildings, all in select targeted markets throughout the United States. As partof our business strategy, we may enter into forward purchase contracts or purchase options for to-be-built multifamily communities and we may make realestate related loans, provide deposit arrangements, or provide performance assurances, as may be necessary or appropriate, in connection with thedevelopment of multifamily communities. As a secondary strategy, we may acquire or originate senior mortgage loans, subordinate loans or real estate loanssecured by interests in multifamily properties, membership or partnership interests in multifamily properties and other multifamily related assets and invest aportion of our assets in other real estate related investments, including other income-producing property types, senior mortgage loans, subordinate loans orreal estate loans secured by interests in other income-producing property types, membership or partnership interests in other income-producing propertytypes as determined by our manager as appropriate for us. Our consolidated financial statements include the accounts of the Company and the Operating Partnership. The Company controls the OperatingPartnership through its sole general partnership interest and has and plans to continue to conduct substantially all its business through the OperatingPartnership. For the year ended December 31, 2018, the Company held an approximate 97.5% weighted average ownership percentage in the OperatingPartnership.Pursuant to the First Amendment to the Fifth Amended and Restated Management Agreement, which was effective January 1, 2016, we replaced theacquisition fee owed to the Manager in connection with acquiring real property with a loan coordination fee that was payable in relation to the amount ofnew debt financed or outstanding debt assumed secured directly by any of our owned real estate asset or the additional amount of any supplementalfinancing secured directly any of our owned real estate assets. In addition, the First Amendment to the Fifth Amended and Restated Management Agreementchanges the name of the fee paid on loans originated by the Company from an "acquisition fee" to a "loan coordination fee."As of July 1, 2017, the Manager reduced the loan coordination fee from 1.6% to 0.6% of the amount of assumed, new incremental or refinanced debtwhich leverages acquired real estate assets. In addition, the Manager reinstated a 1% acquisition fee charged on the cost of acquired real estate assets, whichhad historically been charged prior to its replacement effective January 1, 2016 by the 1.6% loan coordination fee. These changes were put in place to reflecta shift in the efforts of the Manager in property acquisitions.As referred to herein, the Sixth Amended and Restated Management Agreement, as it may be amended, effective as of June 3, 2016, among theCompany, our Operating Partnership and our Manager is referred to as the Management Agreement. We have no employees of our own; our Managerprovides all managerial and administrative personnel to us pursuant to the Management Agreement. We also pay asset management fees, general andadministrative expense fees, property management fees, construction management fees, leasing fees related to the management of our real estate portfolio(which may be waived solely at our discretion and recognized at a later date upon certain conditions), and disposition fees on the sale of a real estate asset. Inaddition, our Manager has no obligation to provide our board of directors with prior notice of a proposed investment transaction, but leaves intact ourManager’s obligation to notify the board of directors within 30 days following completion of an investment transaction.Both our Manager and our Operating Partnership are related parties to us.1Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.At December 31, 2018, our portfolio of current and potential real estate assets consisted of: Owned as ofDecember 31,2018 Potential additionsfrom real estate loaninvestment portfolio(1) (2) Potential total Multifamily communities: Properties32 10 42 Units9,768 3,047 12,815 Grocery-anchored shopping centers: Properties45 — 45 Gross leasable area (square feet)4,730,695 — 4,730,695 Student housing properties: Properties7 2 9 Units1,679 423 2,102 Beds5,208 1,359 6,567 Office buildings: Properties7 1 8 Rentable square feet2,578,000 187,000 2,765,000 (1) We evaluate each project individually and we make no assurance that we will acquire any of the underlying propertiesfrom our real estate loan investment portfolio. (2) The Company has terminated various purchase option agreements in exchange for termination fees. These propertiesare excluded from the potential additions from our real estate loan investment portfolio.We completed our initial public offering, or the IPO, on April 5, 2011. Our common stock, par value $.01 per share, or our Common Stock, is tradedon the NYSE exchange under the symbol "APTS."Investment StrategyWe seek to maximize returns for our stockholders by employing efficient management techniques to grow income and create asset value. Ourinvestment strategies may include, without limitation, the following:•Acquiring Class “A” multifamily assets in performing and stable markets throughout the United States; these properties, we believe, will generatesustainable and growing cash flow from operations sufficient to allow us to cover the dividends that we expect to declare and pay and which webelieve will have the potential for capital appreciation. These multifamily assets will generally be located in metropolitan statistical areas, or MSAs,with at least one million people which we expect will generate job growth and where we believe new multifamily development of comparableproperties is able to be absorbed at attractive rental rates.•Acquiring Class “A” multifamily assets that are intended to be financed with longer-term, assumable, fixed-rate debt typically provided byFHA/HUD programs.•Acquiring Class “A” multifamily assets that present an opportunity to implement a value-add program whereby the properties can be upgraded orimproved physically to better take advantage of the market.•Acquiring grocery-anchored shopping centers, typically anchored by one of the market-dominant grocers in that particular market.•Acquiring leading Class “A” office properties in high-growth markets across the U.S.•Acquiring Class “A” student housing properties at major universities around the United States. These assets will be located proximate to campuseswith demonstrated track records of occupancy and rental rates. The universities served by these assets should generally be larger institutions withstated policies of increased enrollment and market trends that indicate new development is being or should be absorbed at attractive rental rates.2Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.•Originating real estate investment loans secured by interests in multifamily communities, membership or partnership interests in multifamilycommunities, other multifamily related assets, student housing properties, grocery-anchored shopping centers and office properties.•It is our policy to acquire any of our target assets primarily for income, and only secondarily for possible capital gain. As part of our businessstrategy, we may enter into forward purchase contracts or purchase options for to-be-built multifamily communities and we may make real estaterelated loans, provide deposit arrangements, or provide performance assurances, as may be necessary or appropriate, in connection with theconstruction of multifamily communities and other properties.•We also may invest in real estate related debt, including, but not limited to, newly or previously originated first mortgage loans on multifamilyproperties that meet our investment criteria, which are performing or non-performing, newly or previously originated real estate related loans onmultifamily properties that meet our investment criteria (second or subsequent mortgages), which are performing or non-performing, and tranches ofsecuritized loans (pools of collateralized mortgaged-backed securities) on multifamily properties that meet our investment criteria, which areperforming or non-performing. In connection with our investments in real estate related debt, we may negotiate the inclusion of exclusive purchaseoptions on the to-be-developed properties. These purchase options may include a fixed purchase price set at the time we enter into the loan, or apurchase price which is calculated as a certain discount from market capitalization rates at the date of exercise of such purchase option. Certain ofthe purchase options we hold may be settled by cash payments to us in the event we elect not to acquire the underlying property.Any asset acquisitions from affiliated third parties have been, and will continue to be, subject to approval by our conflicts committee comprisedsolely of independent directors. Our Manager's investment committee will periodically review our investment portfolio and its compliance with ourinvestment guidelines and policies, and provide our board of directors an investment report at the end of each quarter in conjunction with its review of ourquarterly results. Our investment guidelines, the assets in our portfolio, the decision to utilize leverage, and the appropriate levels of leverage are periodicallyreviewed by our board of directors as part of their oversight of our Manager. Our board of directors may amend or revise our investment guidelines without avote of the stockholders.Financing StrategyWe intend to finance the acquisition of investments using various sources of capital, as described in the section entitled “Management's Discussionand Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” included in this Annual Report on Form 10-K. Included inthis discussion are details regarding (i) our offering of $1.5 billion Units, consisting of one share of series A redeemable preferred stock, or Series A PreferredStock, and one warrant exercisable into 20 shares of Common Stock, or Series A Units, (ii) our offering of up to $150 million of Common Stock pursuant toour "at the market" offering, or the 2016 ATM Offering, which commenced with the first settlement in August 2016, and (iii) our offering of 500,000 shares ofour series m preferred stock, or mShares, pursuant to our mShares Offering. Our mShares Offering was declared effective on December 2, 2016 and our offeringof 1,500,000 Series A Units, or our $1.5 Billion Unit Offering, was declared effective on February 14, 2017. The Series A Preferred Stock and our mShares arecollectively referred to as our Preferred Stock.We intend to utilize leverage in making our investments. The number of different 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 tomake more investments than would otherwise be possible, resulting in a larger and more diversified portfolio. See the section entitled "Risk Factors" in Item1A of this Annual Report on Form 10-K for more information about the risks related to operating on a leveraged basis.We generally intend to target leverage levels (secured and unsecured) between 50% and 65% of the fair market value of our tangible assets(including our real estate assets, real estate loans, notes receivable, accounts receivable and cash and cash equivalents) on a portfolio basis. As ofDecember 31, 2018, our outstanding debt (both secured and unsecured) was approximately 52.4% of the value of our tangible assets on a portfolio basisbased on our estimates of fair market value at December 31, 2018. Neither our charter nor our by-laws contain any limitation on the amount of leverage wemay use. Our investment guidelines, which can be amended by our board without stockholder approval, limit our borrowings (secured and unsecured) to 75%of the cost of our tangible assets at the time of any new borrowing. These targets, however, will not apply to individual real estate assets or investments. Theamount of leverage we will place on particular investments will depend on our Manager's assessment of a variety of factors which may include the anticipatedliquidity and price volatility of the assets in our investment portfolio, the potential for losses and extension risk in the portfolio, the availability and cost offinancing the asset, our opinion of the creditworthiness of our financing counterparties, the health of the U.S. economy and the health of the commercial realestate market in general. In addition, factors such as our outlook on interest rates, changes in the yield curve slope, the level and volatility of3Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.interest rates and their associated credit spreads, the underlying collateral of our assets and our outlook on credit spreads relative to our outlook on interestrate and economic performance could all impact our decision and strategy for financing the target assets. At the date of acquisition of each asset, weanticipate that the investment cost for such asset will be substantially similar to its fair market value. However, subsequent events, including changes in thefair market value of our assets, could result in our exceeding these limits. Finally, we intend to acquire all our properties through separate single purposeentities and intend to finance each of these properties using debt financing techniques for that property alone, without any cross-collateralization to our otherproperties or any guarantees by us or our Operating Partnership. We have an Amended and Restated Credit Agreement, or Credit Facility, with Key Bank,N.A., or Key Bank. The Credit Facility provides for our $200.0 million revolving credit facility, or the Revolving Line of Credit. Other than with regard toour Credit Facility, as of December 31, 2018, we held no debt at the Company or operating partnership levels, had no cross-collateralization of our real estatemortgages, and had no contingent liabilities at the Company or operating partnership levels with regard to our secured mortgage debt on our properties.Leverage may be obtained from a variety of sources, including the Federal Home Loan Mortgage Corporation ("Freddie Mac"), the Federal NationalMortgage Association ("Fannie Mae"), commercial banks, credit companies, the Federal Housing Administration ("FHA"), a unit of the Department ofHousing and Urban Development ("HUD"), insurance companies, pension funds, endowments, financial services companies and other institutions who wishto provide debt financing for our assets.Our secured and unsecured aggregate borrowings are intended by us to be reasonable in relation to our net assets and will be reviewed by our boardof directors at least quarterly. In determining whether our borrowings are reasonable in relation to our net assets, we expect that our board of directors willconsider many factors, including the lending standards of government-sponsored enterprises, such as Fannie Mae, Freddie Mac and other companies for loansin connection with the financing of multifamily properties, the leverage ratios of publicly traded and non-traded REITs with similar investment strategies,whether we have positive leverage (in that, the board of directors will compare the capitalization rates of our properties to the interest rates on theindebtedness of such properties) and general market and economic conditions. There is no limitation on the amount that we may borrow for any singleinvestment or the number of mortgages that may be placed on any one property.Branding StrategyOur Manager has branded, and intends to brand, all apartment communities owned by us as “A Preferred Apartment Community” which we believesignifies outstanding brand and management standards, and has obtained all rights to the trademarks, including federal registration of the trademarks with theUnited States Patent and Trademark Office, to secure such brand in connection with such branding. We believe these campaigns will enhance each individualproperty's presence in relation to other properties within that marketplace.On September 17, 2010, we entered into a trademark license and assignment agreement pursuant to which we granted an exclusive, worldwide, fully-paid, royalty-free license of all our trademarks to our Manager and agreed to assign all of our trademarks to our Manager upon the applications related to ourtrademarks being successfully converted to use based applications with the United States Patent and Trademark Office. Pursuant to this agreement, in March2012, we assigned these trademarks to our Manager and concurrently entered into a royalty-free license agreement for these trademarks with us as licensee.Similarly, in March 2012, our Manager entered into a royalty-free license agreement with us as licensee with respect to all other intellectual property of theManager. The license agreements will terminate automatically upon termination of the Management Agreement, or upon a material breach of a licenseagreement that remains uncured for more than 30 days after receipt of notice of such breach. Following such termination, we will be required to enter into anew arrangement with our Manager in order to continue our rights to use our Manager's intellectual property. There can be no assurance that we will be ableto enter into such arrangements on terms acceptable to us.Environmental RegulationWe are subject to regulation at the federal, state and municipal levels and are at risk for potential liability should conditions at our properties or ouractions or inaction result in damage to the environment or to persons or properties. These conditions could include the potential presence or growth of mold,potential leaks from current or former underground or above-ground storage tanks, breakage or leaks from sewer lines and risks pertaining to the managementor disposal of wastes and chemicals. We could be liable for the potential costs of compliance, property damage, restoration and other costs which could occurwithout regard to our fault or knowledge of such conditions.In the course of acquiring and owning real estate assets, we typically engage an independent environmental consulting firm to perform a phase Ienvironmental assessment (and if appropriate, a phase II assessment) to identify and mitigate these risks as part of our due diligence process. We believe theseassessment reports provide a reasonable basis for discovery of potential adverse environmental conditions prior to acquisition. If any potential environmentalrisks or conditions are discovered during4Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.our due diligence process, the potential costs of remediation are assessed carefully and factored into the cost of acquisition, assuming the identified risks andfactors are deemed to be manageable and reasonable. Some risks or conditions may be identified that are significant enough to cause us to abandon thepossibility of acquiring a given property. As of December 31, 2018, we have no knowledge of any material claims made or pending against us with regard toenvironmental matters for which we could be found liable, nor are we aware of any potential hazards to the environment related to any of our propertieswhich could reasonably be expected to result in a material loss.CompetitionThe multifamily housing industry is highly fragmented and we compete for residents with a large number of other quality apartment communities inour target markets which are owned by public and private companies, including other REITs, many of which are larger and have more resources than ourCompany. The number of competitive multifamily properties in a particular market could adversely affect our ability to lease our multifamily communities,as well as the rents we are able to charge. In addition, other forms of residential properties, including single family housing and town homes, provide housingalternatives to potential residents of quality apartment communities. The factors on which we focus to compete for residents in our multifamily communitiesinclude our high level of resident service, the quality of our apartment communities (including our landscaping and amenity offerings), and the desirabilityof our locations. Resident leases at our apartment communities are priced competitively based on levels of supply and demand within our target markets andwe believe our communities offer a compelling value to prospective residents.Similarly, competition for tenants and acquisition of existing centers in the grocery-anchored shopping center sector in our target markets isconsiderable, consisting of public and private companies, pension funds, high net worth individuals and family offices. In addition, a significant competitorin this sector are some of the grocery anchors themselves as they acquire land and build their own stores or acquire the entire center where they are the anchor.We are faced with the challenge of maintaining high occupancy rates with a financially stable tenant base. In order to attract quality prospective tenants andretain current tenants upon expiration of their leases, we focus on improving the design and visibility of our centers, building strong relationships with ourtenants, and reducing excess operating costs and increasing tenant satisfaction through proactive asset and property management. We target acquisitions inmarkets with solid surrounding demographics, quality underlying real estate locations, and centers where our asset management approach can provide anenvironment conducive to creating sales productivity for our tenants.We compete with other primarily institutional-quality owners and investors in the business of acquiring, investing to develop, leasing and operatingoffice properties. We leverage relationships, track record, and the high quality of our physical assets and locations to compete successfully. Additionalprincipal factors of competition are the leasing terms (including rental rates and concessions or allowances offered) and the terms of any other investmentactivity such as real estate loan investments in new development. Additionally, our ability to compete depends upon, among other factors, trends of thenational and local economies, investment alternatives, financial condition and operating results of current and prospective tenants, availability and cost ofcapital, construction and renovation costs, taxes, utilities, governmental regulations, legislation and population trends. Available InformationThe Company makes available all reports which are filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonablypracticable after such material has been filed with, or furnished to, the SEC for viewing or download free of charge at the Company's website:www.pacapts.com. You may obtain information concerning the operation of the SEC's Public Reference Room by calling the SEC at 1-800-SEC-0330. TheSEC maintains a website at http://www.sec.gov that contains reports, proxy statements and information statements, and other information, which you mayobtain free of charge.Item 1A. Risk FactorsIn addition to the other information contained in this Annual Report on Form 10-K, the following risk factors should be considered carefully inevaluating us and our business. Our business, operating results, prospects and financial condition could be materially adversely affected by any of theserisks. The risks and uncertainties described below are not the only ones we face, but do represent those risks and uncertainties that we believe are materialto us. Additional risks and uncertainties not presently known to us or that, as of the date of this Annual Report on Form 10-K, we deem immaterial also mayharm our business. This “Risk Factors” section contains references to our “capital stock” and to our “stockholders.” Unless expressly stated otherwise, thereferences to our “capital stock” represent our common stock and any class or series of our preferred stock, while the references to our “stockholders”represent holders of our common stock and any class or series of our preferred stock. Unless expressly stated otherwise, the references to our Preferred Stockrefer to both our mShares and our Series A Preferred Stock.5Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Risks Related to an Investment in Our CompanyOur ability to grow the Company and execute our business strategy may be impaired if we are unable to secure adequate financing.Our ability to grow the Company and execute our business strategy depends on our access to an appropriate blend of debt financing, includingunsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including common and preferred equity. At December 31,2018, we had letters of intent in place to refinance mortgage debt on our Lenox Village Town Center and Retreat at Lenox properties and to renew/extend ourCredit Facility. Recently, domestic and international financial markets have experienced unusual volatility and uncertainty. Debt or equity financing maynot be available in sufficient amounts, on favorable terms or at all. Returns on our assets and our ability to make acquisitions could be adversely affected byour inability to secure financing on reasonable terms, if at all. Additionally, if we issue additional equity securities to finance our investments instead ofincurring debt (through our $1.5 Billion Unit Offering, offerings through our registration statement on Form S-3 (File No. 333-211178), or the ShelfRegistration Statement, our 2016 ATM Offering, our mShares Offering, or other offerings), the interests of our existing stockholders could be diluted.Distributions paid from sources other than our net cash provided by operating activities, particularly from proceeds of any offerings of our securities, willresult in us having fewer funds available for the acquisition of properties and other real estate-related investments, which may adversely affect our abilityto fund future distributions with net cash provided by operating activities and may adversely affect our stockholders' overall return.We have paid distributions from sources other than from net cash provided by operating activities. If we do not generate sufficient net cash providedby operating activities and other sources, such as from borrowings, the sale of additional securities, advances from our Manager, our Manager's deferral,suspension and/or waiver of its fees and expense reimbursements, to fund distributions, we may use the proceeds from any offering of our securities.Moreover, our board of directors may change our distribution policy, in its sole discretion, at any time, except for distributions on our Preferred Stock, whichwould require approval by a supermajority vote of our Common stockholders. Distributions made from offering proceeds may be a return of capital tostockholders, from which we will have already paid offering expenses in connection with the related offering. We have not established any limit on theamount of proceeds from our securities offerings that may be used to fund distributions, except that, in accordance with our organizational documents andMaryland law, we may not make distributions that would: (1) cause us to be unable to pay our debts as they become due in the usual course of business; (2)cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences, if any; or (3) jeopardize our ability to qualify as aREIT.If we fund distributions from the proceeds of an offering of our securities, we will have less funds available for acquiring properties or real estate-related investments. As a result, the return our stockholders realize on their investment may be reduced. Funding distributions from borrowings could restrictthe amount we can borrow for investments, which may affect our profitability. Funding distributions with the sale of assets or the proceeds of an offering ofour securities may affect our ability to generate net cash provided by operating activities. Funding distributions from the sale of our securities could dilutethe interest of our common stockholders if we sell shares of our Common Stock or securities convertible or exercisable into shares of our Common Stock tothird party investors. Payment of distributions from the mentioned sources could restrict our ability to generate sufficient net cash provided by operatingactivities, affect our profitability and/or affect the distributions payable to our stockholders upon a liquidity event, any or all of which may have an adverseeffect on our stockholders.We may suffer from delays in locating suitable investments, which could adversely affect the return on our stockholders' investment.Our ability to achieve our investment objectives and to make distributions to our stockholders is dependent upon our Manager's performance in theacquisition of, and arranging of financing for, investments, as well as our property managers' performance in the selection of residents and tenants and thenegotiation of leases and our Manager's performance in the selection of retail tenants and the negotiation of leases. The current market for properties thatmeet our investment objectives is highly competitive, as is the leasing market for such properties. The more proceeds we raise in current and future offeringsof our securities, the greater our challenge will be to invest all the net offering proceeds on attractive terms. Our stockholders will not have the opportunity toevaluate the terms of transactions or other economic or financial data concerning our investments. Our stockholders must rely entirely on the oversight of ourboard of directors, the management ability of our Manager and the performance of our Manager and property managers. We cannot be sure that our Managerwill be successful in obtaining suitable investments on financially attractive terms.6Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Additionally, as a public company, we are subject to ongoing reporting requirements under the Exchange Act. Pursuant to the Exchange Act, wemay be required to file with the SEC financial statements of properties we acquire and investments we make in real estate-related assets. To the extent anyrequired financial statements are not available or cannot be obtained, we may not be able to acquire the investment. As a result, we may be unable to acquirecertain properties or real estate-related assets that otherwise would be a suitable investment. We could suffer delays in our investment acquisitions due tothese reporting requirements.Furthermore, if we acquire properties prior to, during, or upon completion of construction, it will typically take several months following completionof construction to lease available space. Therefore, our stockholders could experience delays in the receipt of distributions attributable to those particularproperties.Delays we encounter in the selection and acquisition of investments could adversely affect our stockholders' returns. In addition, if we are unable toinvest the proceeds of any offering of our securities in real properties and real estate-related assets in a timely manner, we will hold the proceeds of thoseofferings in an interest-bearing account, invest the proceeds in short-term, investment-grade investments or pay down our Credit Facility, which generatelower returns than we anticipate with our target assets, or, ultimately, liquidate. In such an event, our ability to make distributions to our stockholders and thereturns to our stockholders would be adversely affected.The cash distributions our stockholders receive may be less frequent or lower in amount than our stockholders expect.Our board of directors will determine the amount and timing of distributions. In making this determination, our directors will consider all relevantfactors, including the amount of cash available for distribution, capital expenditure and reserve requirements and general operational requirements. Wecannot assure our stockholders that we will continue to generate sufficient available cash flow to fund distributions nor can we assure our stockholders thatsufficient cash will be available to make distributions to our stockholders. As we are a growing company, it is more difficult for us to predict the amount ofdistributions our stockholders may receive and we may be unable to pay, maintain or increase distributions over time. Our inability to acquire properties orreal estate-related investments may have a negative effect on our ability to generate sufficient cash flow from operations to pay distributions.Further, if the aggregate amount of our distributions in any given year exceeds our earnings and profits (as determined for U.S. federal income taxpurposes), the U.S. federal income tax treatment of the excess amount will be either (i) a return of capital or (ii) a gain from the sale or exchange of property tothe extent that a stockholder's tax basis in our Common Stock equals or is reduced to zero as the result of our current or prior year distributions.Upon the sale of any individual property, holders of our Preferred Stock do not have a priority over holders of our Common Stock regarding return ofcapital.Holders of our Preferred Stock do not have a right to receive a return of capital prior to holders of our Common Stock upon the individual sale of aproperty. Depending on the price at which such property is sold, it is possible that holders of our Common Stock will receive a return of capital prior to theholders of our Preferred Stock, provided that any accrued but unpaid dividends have been paid in full to holders of Preferred Stock. It is also possible thatholders of our Common Stock will receive additional distributions from the sale of a property (in excess of their capital attributable to the asset sold) beforethe holders of Preferred Stock receive a return of their capital.Our stockholders' percentage of ownership may become diluted if we issue new shares of stock or other securities, and issuances of additional preferredstock or other securities by us may further subordinate the rights of the holders of our Common Stock.We may make redemptions of Series A Preferred Stock or mShares in shares of our Common Stock. Although the number of redemptions areunknown, the number of shares to be issued in connection with such redemptions will fluctuate based on the price of our Common Stock. Any sales orperceived sales in the public market of shares of our Common Stock issued upon such redemptions could adversely affect the prevailing market prices ofshares of our Common Stock. The issuance of Common Stock upon such redemptions or from the exercise of outstanding Warrants also would have the effectof reducing our net income per share. In addition, the existence of Preferred Stock may encourage short selling by market participants because redemptionscould depress the market price of our Common Stock.Our board of directors is authorized, without stockholder approval, to cause us to issue additional shares of our Preferred Stock or to raise capitalthrough the issuance of additional preferred stock (including equity or debt securities convertible into preferred stock or our Common Stock), options,warrants and other rights, on such terms and for such consideration as our board of directors in its sole discretion may determine subject to the rules of NYSE.Any such issuance could result in dilution of the7Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.equity of our stockholders. Our board of directors may, in its sole discretion, authorize us to issue Common Stock or other equity or debt securities (a) topersons from whom we purchase multifamily communities, as part or all of the purchase price of the community, or (b) to our Manager in lieu of cashpayments required under the Management Agreement or other contract or obligation. Our board of directors, in its sole discretion, may determine the value ofany Common Stock or other equity or debt securities issued in consideration of multifamily communities acquired or services provided, or to be provided, tous.Our charter also authorizes our board of directors, without stockholder approval, to designate and issue one or more classes or series of preferredstock in addition to the Preferred Stock (including equity or debt securities convertible into preferred stock) and to set or change the voting, conversion orother rights, preferences, restrictions, limitations as to dividends or other distributions and qualifications or terms or conditions of redemption of each class orseries of shares so issued. If any additional preferred stock is publicly offered, the terms and conditions of such preferred stock (including any equity or debtsecurities convertible into preferred stock) will be set forth in a registration statement registering the issuance of such preferred stock or equity or debtsecurities convertible into preferred stock. Because our board of directors has the power to establish the preferences and rights of each class or series ofpreferred stock, it may afford the holders of any series or class of preferred stock preferences, powers and rights senior to the rights of holders of our CommonStock or the Preferred Stock. If we ever create and issue additional preferred stock or equity or debt securities convertible into Preferred Stock with adistribution preference over our Common Stock or the Preferred Stock, payment of any distribution preferences of such new outstanding preferred stockwould reduce the amount of funds available for the payment of distributions on our Common Stock and our Preferred Stock. Further, holders of preferredstock are normally entitled to receive a preference payment if we liquidate, dissolve, or wind up before any payment is made to our common stockholders,likely reducing the amount common stockholders would otherwise receive upon such an occurrence. In addition, under certain circumstances, the issuance ofadditional preferred stock may delay, prevent, render more difficult or tend to discourage a merger, tender offer, or proxy contest, the assumption of controlby a holder of a large block of our securities, or the removal of incumbent management.Stockholders have no rights to buy additional shares of stock or other securities if we issue new shares of stock or other securities. We may issuecommon stock, convertible debt, preferred stock or warrants pursuant to a subsequent public offering or a private placement, or to sellers of properties wedirectly or indirectly acquire instead of, or in addition to, cash consideration. Stockholders who do not participate in any future stock issuances willexperience dilution in the percentage of the issued and outstanding stock they own. In addition, depending on the terms and pricing of any additionalofferings and the value of our investments, our stockholders also may experience dilution in the book value and fair market value of, and the amount ofdistributions paid on, their shares of our Common Stock or Preferred Stock.Our internal control over financial reporting is effective only at the reasonable assurance level, and undetected errors could adversely affect ourreputation, results of operations and stock price. The accuracy of our financial reporting depends on the effectiveness of our internal control over financial reporting. Internal control over financialreporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements and may not prevent or detectmisstatements because of its inherent limitations. These limitations include the possibility of human error, inadequacy or circumvention of internal controlsand fraud. If we do not attain and maintain effective internal control over financial reporting or implement controls sufficient to provide reasonable assurancewith respect to the preparation and fair presentation of our financial statements, we could be unable to file accurate financial reports on a timely basis, and ourreputation, results of operations and stock price could be materially adversely affected.Breaches of our data security could materially harm our business and reputation.Information security risks have generally increased in recent years due to the rise in new technologies and the increased sophistication and activitiesof perpetrators of cyber attacks around the world. We collect and retain certain personal information provided by our residents and tenants. In addition, weengage third party service providers that may have access to such personally identifiable information in connection with providing necessary informationtechnology and security and other business services to us. While we have implemented a variety of security measures to protect the confidentiality of thisinformation and periodically review and improve our security measures, there can be no assurance that we will be able to prevent unauthorized access to thisinformation. Any breach of our data security measures and loss of this information may result in legal liability and costs (including damages and penalties),as well as damage to our reputation, that could materially and adversely affect our business and financial performance, and require significant managementattention and resources to remedy the damages and penalties that result. 8Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.The properties we operate may not produce the cash flow required to meet our REIT minimum distribution requirements, and we may decide to borrowfunds to satisfy such requirements, which could adversely affect our overall financial performance.We may decide to borrow funds in order to meet the REIT minimum distribution requirements even if our management believes that the thenprevailing market conditions generally are not favorable for such borrowings or that such borrowings would not be advisable in the absence of certain taxconsiderations. If we borrow money to meet the REIT minimum distribution requirement or for other working capital needs, our expenses will increase, ournet income will be reduced by the amount of interest we pay on the money we borrow and we will be obligated to repay the money we borrow from futureearnings or by selling assets, any or all of which may decrease future distributions to our stockholders.To maintain our status as a REIT, we may be forced to forego otherwise attractive opportunities, which may delay or hinder our ability to meet ourinvestment objectives and may reduce our stockholders' overall return.To maintain our qualification as a REIT, we must satisfy certain tests on an ongoing basis concerning, among other things, the sources of ourincome, the nature of our assets and the amounts we distribute to our stockholders. We may be required to make distributions to stockholders at times when itwould be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Compliance with the REITrequirements may hinder our ability to operate solely on the basis of maximizing profits and the value of our stockholders' investment.There is no public market for our Preferred Stock or Warrants and we do not expect one to develop.There is no public market for our Preferred Stock or Warrants, and we currently have no plan to list these securities on a securities exchange or toinclude these shares for quotation on any national securities market. We cannot assure our stockholders as to the liquidity of any trading market that maydevelop for our Preferred Stock or Warrants. Additionally, our charter contains restrictions on the ownership and transfer of our securities, and theserestrictions may inhibit the ability to sell the Preferred Stock or Warrants promptly or at all. Furthermore, the Warrants will expire four years from the date ofissuance. If a holder is able to sell the Preferred Stock or Warrants, they may only be able to sell them at a substantial discount from the price paid.Accordingly, our stockholders may be required to bear the financial risk of their investment in the shares of Preferred Stock indefinitely. We will be required to terminate the mShares Offering and the $1.5 Billion Unit Offering if our Common Stock is no longer listed on the NYSE or anothernational securities exchange.The classes of Preferred Stock are a "covered security" under the Securities Act and therefore are not subject to registration in the various states inwhich they may be sold due to their seniority to our Common Stock, which is listed on the NYSE. If our Common Stock is no longer listed on the NYSE oranother appropriate exchange, we will be required to register the offering of our Units and mShares in any state in which we subsequently offer the Units andmShares. This would require the termination of the $1.5 Billion Unit offering and the mShares Offering and could result in our raising an amount of grossproceeds that is substantially less than the amount of the gross proceeds we expect to raise if the maximum offering is sold. This would reduce our ability topurchase additional properties and limit the diversification of our portfolio.The Warrants in our $1.5 Billion Unit Offering are not "covered securities" under the Securities Act. The Warrants are subject to state registration inthose states that do not have any exemption for securities convertible into a listed security and the offering must be declared effective in order to sell theWarrants in these states.Our ability to redeem shares of Preferred Stock for cash may be limited by Maryland law.Under Maryland law, a corporation may redeem stock as long as, after giving effect to the redemption, the corporation is able to pay its debts as theybecome due in the usual course (the equity solvency test) and its total assets exceed its total liabilities (the balance sheet solvency test). The Company mayredeem its shares of Preferred Stock in its choice of either cash or Common Stock, at its sole discretion. If the Company is insolvent at any time when aredemption of shares of Preferred Stock is required to be made, the Company may not be able to effect such redemption for cash.The Preferred Stock are senior securities, and rank senior to our Common Stock with respect to dividends and payments upon liquidation.The rights of the holders of shares of our Preferred Stock rank senior to the rights of the holders of shares of our Common Stock as to dividends andpayments upon liquidation. Unless full cumulative dividends on our shares of Preferred Stock for all past dividend periods have been declared and paid (orset apart for payment), we will not declare or pay dividends with respect9Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.to any shares of our Common Stock for any period. Upon liquidation, dissolution or winding up of our Company, the holders of shares of our Preferred Stockare entitled to receive a liquidation preference of $1,000 per share, or the Stated Value, plus all accrued but unpaid dividends, prior and in preference to anydistribution to the holders of shares of our Common Stock or any other class of our equity securities.The Preferred Stock will be subordinate in right of payment to any corporate level debt that we incur in the future, therefore our stockholders' interestscould be diluted by the issuance of additional preferred stock, and by other transactions.The Preferred Stock will be subordinate in right of payment to any corporate level debt that we incur in the future. Future debt we incur may includerestrictions on our ability to pay dividends on our Preferred Stock. The issuance of additional preferred stock on a parity with or senior to the Preferred Stockwould dilute the interests of the holders of the Preferred Stock, and any issuance of preferred stock senior to the Preferred Stock or of additional indebtednesscould affect our ability to pay dividends on, redeem or pay the liquidation preference on the Preferred Stock. While the terms of the Preferred Stock limit ourability to issue shares of a class or series of preferred stock senior in ranking to the Preferred Stock, such terms do not restrict our ability to authorize or issueshares of a class or series of preferred stock with rights to distributions or upon liquidation that are on parity with the Preferred Stock or to incur additionalindebtedness. The articles supplementary of the Preferred Stock do not contain any provision affording the holders of the Preferred Stock protection in theevent of a highly leveraged or other transaction, including a merger or the sale, lease or conveyance of all or substantially all of our assets or business, thatmight adversely affect the holders of the Preferred Stock.We will be able to call our shares of Preferred Stock for redemption under certain circumstances without our stockholders' consent.We will have the ability to call the outstanding shares of Preferred Stock after ten years following the date of original issuance of such shares ofPreferred Stock. At that time, we will have the right to redeem, at our option, the outstanding shares of Preferred Stock, in whole or in part, at 100% of theStated Value, plus any accrued and unpaid dividends. We have the right, in our sole discretion, to pay the redemption price in cash or in equal value of ourCommon Stock, based upon the volume weighted average price of our Common Stock for the 20 trading days prior to the redemption.Risks Related to Our Organization, Structure and ManagementWe are dependent upon our Manager and its affiliates to conduct our operations, and therefore, any adverse changes in the financial health of ourManager or its affiliates, or our relationship with any of them, could hinder our operating performance and the return on our stockholders' investment.We are an externally advised REIT, which means that our Manager provides our management team and support personnel and administers our day-to-day business operations. We are dependent on our Manager and its affiliates to manage our operations and acquire and manage our portfolio of real estateassets. Our Manager will make all decisions with respect to the management of our Company, subject to the oversight of our board of directors. Our Managerwill depend upon the fees and other compensation that it will receive from us in connection with the purchase, management and sale of our investments toconduct its operations, as well as a line of credit we extended to our manager that is secured by fees we owe them. Any adverse changes in the financialcondition of, or our relationship with our Manager or its affiliates could hinder their ability to successfully manage our operations and our portfolio ofinvestments.Our success is dependent on the performance of our Manager.We rely on the management ability of our Manager, subject to the oversight and approval of our board of directors. Accordingly, if our Managersuffers or is distracted by adverse financial or operational problems in connection with its operations or operations unrelated to us, our Manager may beunable to allocate time and/or resources to our operations. If our Manager is unable to allocate sufficient resources to oversee and perform our operations forany reason, we may be unable to achieve our investment objectives or to pay distributions to our stockholders.If our Manager loses or is unable to retain or replace key personnel, our ability to implement our investment strategies could be hindered, which couldadversely affect our ability to make distributions and the value of our stockholders' investment.Our success depends to a significant degree upon the contributions of certain of our executive officers and other key personnel of our Manager. Inparticular, we depend on the skills and expertise of Daniel M. DuPree, our Chief Executive Officer,10Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.and Leonard A. Silverstein, our President and Chief Operating Officer. Neither we nor our Manager have an employment agreement with any of our or its keypersonnel, including Mr. DuPree and Mr. Silverstein, and we cannot guarantee that all, or any, of such personnel, will remain affiliated with us or ourManager. If any of our key personnel were to cease their affiliation with our Manager, our operating results could suffer. Our Manager maintains key personlife insurance that would provide our Manager with proceeds in the event of the death or disability of Mr. Silverstein and Joel T. Murphy, Chief ExecutiveOfficer of New Market Properties.We believe our future success depends upon our Manager's ability to hire and retain highly skilled managerial, operational and marketing personnel.Competition for such personnel is intense, and we cannot assure our stockholders that our Manager will be successful in attracting and retaining such skilledpersonnel. If our Manager loses or is unable to obtain the services of key personnel, our ability to implement our investment strategies could be delayed orhindered, and the value of our stockholders' investment in our Company may decline.Furthermore, our Manager may retain independent contractors to provide various services for us, including administrative services, transfer agentservices and professional services. Such contractors may have no fiduciary duty to our Manager or us and may not perform as expected or desired. Any suchservices provided by independent contractors will be paid for by us as an operating expense.Payment of fees and cost reimbursements to our Manager and its affiliates and third parties will reduce cash available for investment and payment ofdistributions.Our Manager and its affiliates and third parties will perform services for us in connection with, among other things, the offer and sale of oursecurities, including the performance of legal, accounting and financial reporting in connection therewith, the selection and acquisition of our investments;the management and leasing of our properties; the servicing of our mortgage, bridge, real estate or other loans; the administration of our other investmentsand the disposition of our assets. They will be paid substantial fees and cost reimbursements for these services. These fees and reimbursements will reduce theamount of cash available for investment or distributions to our stockholders.If our Manager or its affiliates waive certain fees due to them, our results of operations and distributions may be artificially high.From time to time, our Manager and/or its affiliates has agreed, and may agree in the future to waive all or a portion of the acquisition, assetmanagement or other fees, compensation or incentives due to them, pay general administrative expenses or otherwise supplement stockholder returns in orderto increase the amount of cash available to make distributions to stockholders. If our Manager and/or its affiliates choose to no longer waive or defer suchfees, compensation and incentives or to cease paying general administrative expenses or supplementing stockholder returns, our results of operations will belower than in previous periods and our stockholders' return on their investment in our Company could be negatively affected.The Maryland General Corporation Law prohibits certain business combinations, which may make it more difficult for us to be acquired.Under the Maryland General Corporation Law, “business combinations” between a Maryland corporation and an “interested stockholder” or anaffiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interestedstockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer orissuance or reclassification of equity securities. An interested stockholder is defined as: (i) any person who beneficially owns 10% or more of the votingpower of the then outstanding voting stock of the corporation; or (ii) an affiliate or associate of the corporation who, at any time within the two-year periodprior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which the personotherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subjectto compliance, at or after the time of approval, with any terms and conditions determined by the board.After the expiration of the five-year period described above, any business combination between the Maryland corporation and an interestedstockholder must generally be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:11Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.•80% of the votes entitled to be cast by holders of the then outstanding shares of voting stock of the corporation; and•two-thirds of the votes entitled to be cast by holders of voting stock of the corporation, other than shares held by the interested stockholder withwhom or with whose affiliate the business combination is to be effected, or held by an affiliate or associate of the interested stockholder.These super-majority vote requirements do not apply if the corporation's common stockholders receive a minimum price, as defined under theMaryland General Corporation Law, for their shares in the form of cash or other consideration in the same form as previously paid by the interestedstockholder for its shares. The Maryland General Corporation Law also permits various exemptions from these provisions, including business combinationsthat are exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, ourboard of directors has adopted a resolution exempting any business combination with our Manager or any of its affiliates. Consequently, the five-yearprohibition and the super-majority vote requirements will not apply to business combinations between us and our Manager or any of its affiliates. As a result,our Manager or any of its affiliates may be able to enter into business combinations with us that may not be in the best interest of our stockholders, withoutcompliance with the super-majority vote requirements and the other provisions of the statute. The business combination statute may discourage others fromtrying to acquire control of us and increase the difficulty of consummating any offer.Stockholders have limited control over changes in our policies and operations.Our board of directors determines our major policies, including with regard to financing, growth, debt capitalization, REIT qualification anddistributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders. Holders of our Preferred Stock havelimited to no voting rights. Under our charter and the Maryland General Corporation Law, holders of our Common Stock generally have a right to vote onlyon the following matters:•the election or removal of directors;•the amendment of our charter, except that our board of directors may amend our charter without stockholder approval to:◦change our name;◦change the name or other designation or the par value of any class or series of stock and the aggregate par value of our stock;◦increase or decrease the aggregate number of shares of stock that we have the authority to issue;◦increase or decrease the number of shares of any class or series of stock that we have the authority to issue; and◦effect certain reverse stock splits;•our liquidation and dissolution; and•our being a party to a merger, consolidation, sale or other disposition of all or substantially all our assets or statutory share exchange.All other matters are subject to the discretion of our board of directors.Our authorized but unissued shares of Common Stock and Preferred Stock may prevent a change in our control.Our charter authorizes us to issue additional authorized but unissued shares of Common Stock or preferred stock, without stockholder approval, upto 415,066,666 shares. In addition, our board of directors may, without stockholder approval, amend our charter from time to time to increase or decrease theaggregate number of shares of our stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify anyunissued shares of Common Stock or Preferred Stock and set the preferences, rights and other terms of the classified or reclassified shares. As a result, ourboard of directors may establish a class or series of common stock or preferred stock that could delay or prevent a merger, third party tender offer or similartransaction or a change in incumbent management that might involve a premium price for our securities or otherwise be in the best interest of ourstockholders.Because of our holding company structure, we depend on our Operating Partnership subsidiary and its subsidiaries for cash flow and we will bestructurally subordinated in right of payment to the obligations of such Operating Partnership subsidiary and its subsidiaries.We are a holding company with no business operations of our own. Our only significant asset is and will be the general and limited partnershipinterests in our Operating Partnership. We conduct, and intend to conduct, all our business operations through our Operating Partnership. Accordingly, ouronly source of cash to pay our obligations is distributions from our Operating12Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Partnership and its subsidiaries of their net earnings and cash flows. We cannot assure our stockholders that our Operating Partnership or its subsidiaries willbe able to, or be permitted to, make distributions to us that will enable us to make distributions to our stockholders from cash flows from operations. Each ofour Operating Partnership's subsidiaries is or will be a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit ourability to obtain cash from such entities. In addition, because we are a holding company, your claims as stockholders will be structurally subordinated to allexisting and future liabilities and obligations of our Operating Partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation orreorganization, our assets and those of our Operating Partnership and its subsidiaries will be able to satisfy your claims as stockholders only after all our andour Operating Partnership's and its subsidiaries' liabilities and obligations have been paid in full.Our rights and the rights of our stockholders to recover on claims against our directors and officers are limited, which could reduce our stockholders, andour recovery against them if they negligently cause us to incur losses.The Maryland General Corporation Law provides that a director has no liability in such capacity if he performs his duties in good faith, in a mannerhe reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances.A director who performs his or her duties in accordance with the foregoing standards should not be liable to us or any other person for failure to discharge hisor her obligations as a director.In addition, our charter provides that our directors and officers will not be liable to us or our stockholders for monetary damages unless the directoror officer actually received an improper benefit or profit in money, property or services, or is adjudged to be liable to us or our stockholders based on afinding that his or her action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in theproceeding. Our charter also requires us, to the maximum extent permitted by Maryland law, to indemnify and, without requiring a preliminary determinationof the ultimate entitlement to indemnification, pay or reimburse reasonable expenses in advance of final disposition of a proceeding to any individual who isa present or former director or officer and who is made or threatened to be made a party to the proceeding by reason of his or her service in that capacity orany individual who, while a director or officer and at our request, serves or has served as a director, officer, partner, trustee, member or manager of anothercorporation, real estate investment trust, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise and who ismade or threatened to be made a party to the proceeding by reason of his or her service in that capacity. With the approval of our board of directors, we mayprovide such indemnification and advance for expenses to any individual who served a predecessor of the Company in any of the capacities described aboveand any employee or agent of the Company or a predecessor of the Company, including our Manager and its affiliates.We also are permitted to purchase and we currently maintain insurance or provide similar protection on behalf of any directors, officers, employeesand agents, including our Manager and its affiliates, against any liability asserted which was incurred in any such capacity with us or arising out of suchstatus. This may result in us having to expend significant funds, which will reduce the available cash for distribution to our stockholders.If we internalize our management functions, the holders of our previously outstanding Common Stock could be diluted, and we could incur othersignificant costs associated with internalizing and being self-managed.In the future, our board of directors may consider internalizing the functions performed for us by our Manager by acquiring our Manager's assets. Themethod by which we could internalize these functions could take many forms. There is no assurance that internalizing our management functions will bebeneficial to us and our stockholders. Such an acquisition could also result in dilution of our stockholders if common stock or securities convertible intocommon stock are issued in the internalization and could reduce earnings per share and funds from operations attributable to common stockholders andunitholders, or FFO, as defined by the National Association of Real Estate Investment Trusts, or NAREIT. For example, we may not realize the perceivedbenefits or we may not be able to properly integrate a new staff of managers and employees or we may not be able to effectively replicate the servicesprovided previously by our Manager or its affiliates. Internalization transactions involving the acquisition of managers affiliated with entity sponsors havealso, in some cases, been the subject of litigation. Even if these claims are without merit, we could be forced to spend significant amounts of time and moneydefending claims which would reduce the amount of time and funds available for us to invest in properties or other investments and to pay distributions. Allthese factors could have a material adverse effect on our results of operations, financial condition and ability to pay distributions.13Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Our stockholders' investment returns may be reduced if we are required to register as an investment company under the Investment Company Act.We are not registered, and do not intend to register ourselves or any of our subsidiaries, as an investment company under the Investment CompanyAct of 1940, as amended, or the Investment Company Act. If we become obligated to register the company or any of our subsidiaries as an investmentcompany, the registered entity would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among otherthings, limitations on capital structure, restrictions on specified investments, prohibitions on transactions with affiliates and compliance with reporting,record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.We intend to conduct our operations, directly and through wholly owned and majority owned subsidiaries, so that we and each of our subsidiariesare exempt from registration as an investment company under the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, acompany is not deemed to be an “investment company” if it neither is, nor holds itself out as being, engaged primarily, nor proposes to engage primarily, inthe business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a company is not deemed to be an“investment company” if it neither is engaged, nor proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities anddoes not own or propose to acquire “investment securities” having a value exceeding 40% of the value of its total assets (exclusive of government securitiesand cash items) on an unconsolidated basis.We believe that we and most, if not all, of our wholly owned and majority owned subsidiaries will not be considered investment companies undereither Section 3(a)(1)(A) or Section 3(a)(1)(C) of the Investment Company Act. If we or any of our wholly owned or majority owned subsidiaries would everinadvertently fall within one of the definitions of “investment company,” we intend to rely on the exception provided by Section 3(c)(5)(C) of the InvestmentCompany Act. Under Section 3(c)(5)(C), the SEC staff generally requires a company to maintain at least 55% of its assets directly in qualifying assets and atleast 80% of qualifying assets in a broader category of real estate related assets to qualify for this exception. Mortgage-related securities may or may notconstitute qualifying assets, depending on the characteristics of the mortgage-related securities, including the rights that we have with respect to theunderlying loans. The Company's ownership of mortgage-related securities, therefore, is limited by provisions of the Investment Company Act and SEC staffinterpretations.The method we use to classify our assets for purposes of the Investment Company Act will be based in large measure upon no-action positions takenby the SEC staff in the past. These no-action positions were issued in accordance with factual situations that may be substantially different from the factualsituations we may face, and a number of these no-action positions were issued more than 20 years ago. No assurance can be given that the SEC staff willconcur with our classification of our assets. In addition, the SEC staff may, in the future, issue further guidance that may require us to re-classify our assets forpurposes of qualifying for an exclusion from regulation under the Investment Company Act. If we are required to re-classify our assets, we may no longer bein compliance with the exclusion from the definition of an “investment company” provided by Section 3(c)(5)(C) of the Investment Company Act.A change in the value of any of our assets could cause us or one or more of our wholly owned or majority owned subsidiaries to fall within thedefinition of “investment company” and negatively affect our ability to maintain our exemption from regulation under the Investment Company Act. Toavoid being required to register us or any of our subsidiaries as an investment company under the Investment Company Act, we may be unable to sell assetswe would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income- orloss-generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we wouldotherwise want to acquire and would be important to our investment strategy.As part of our Manager's obligations under the Management Agreement, our Manager will agree to refrain from taking any action which, in its solejudgment made in good faith, would subject us to regulation under the Investment Company Act. Failure to maintain an exclusion from registration under theInvestment Company Act would require us to significantly restructure our business plan. For example, because affiliate transactions are generally prohibitedunder the Investment Company Act, we would not be able to enter into transactions with any of our affiliates if we are required to register as an investmentcompany, and we may be required to terminate our Management Agreement and any other agreements with affiliates, which could have a material adverseeffect on our ability to operate our business and pay distributions. If we were required to register us as an investment company but failed to do so, we wouldbe prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceableunless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.14Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Risks Related to Conflicts of InterestOur Manager, our executive officers and their affiliates may face competing demands relating to their time, and if inadequate time is devoted to ourbusiness, our stockholders' investment may be negatively impacted.We rely on our executive officers and the executive officers and employees of our Manager and its affiliates for the day-to-day operation of ourbusiness. These persons also conduct or may conduct in the future day-to-day operations of other programs and entities sponsored by or affiliated with ourManager. Because these persons have or may have such interests in other real estate programs and engage in other business activities, they may experienceconflicts of interest in allocating their time and resources among our business and these other activities. The amount of time that our Manager and itsaffiliates spend on our business will vary from time to time and is expected to be greater while we are raising money and acquiring investments. During timesof intense activity in other programs and ventures, they may devote less time and fewer resources to our business than are necessary or appropriate to manageour business. We expect that as our real estate activities expand, our Manager will attempt to hire additional employees who would devote substantially alltheir time to our business. There is no assurance that our Manager will devote adequate time to our business. If our Manager or any of its respective affiliatessuffers or is distracted by adverse financial or operational problems in connection with its operations unrelated to us, it may allocate less time and resourcesto our operations. If any of the foregoing events occur, the returns on our investments, our ability to make distributions to stockholders and the value of ourstockholders' investment may suffer.Our Manager, our executive officers and their affiliates may face conflicts of interest, and these conflicts may not be resolved in our favor, which couldnegatively impact our stockholders' investment.Our executive officers and the employees of our Manager and its respective affiliates on whom we rely could make substantial profits as a result ofinvestment opportunities allocated to entities other than us. As a result, these individuals could pursue transactions that may not be in our best interest, whichcould have a material adverse effect on our operations and our stockholders' investment. Our Manager and its affiliates may be engaged in other activitiesthat could result in potential conflicts of interest with the services that they provide to us.Our Manager and its affiliates will receive substantial fees from us, which could result in our Manager and its affiliates taking actions that are notnecessarily in the best interest of our stockholders.Our Manager and its affiliates will receive substantial fees from us, including an asset management fee based on the total value of our assets, and itsaffiliates will receive fees based on our revenues, which, in each case, could incent our Manager to use higher levels of leverage to finance investments oraccumulate assets to increase fees than would otherwise be in our best interests. These fees could influence our Manager's advice to us, as well as thejudgment of the affiliates of our Manager who serve as our officers and directors. Therefore, considerations relating to their compensation from otherprograms could result in decisions that are not in the best interests of our stockholders, which could hurt our income and, as a result, our ability to makedistributions to stockholders and/or lead to a decline in the value of our stockholders' investment.Properties acquired from affiliates of our Manager may be at a price higher than we would pay if the transaction were the result of arm's-lengthnegotiations.The prices we pay to affiliates of our Manager for our properties may be equal to the prices paid by them, plus the costs incurred by them relating tothe acquisition and financing of the properties, or if the price to us is in excess of such cost, substantial justification for such excess may exist and such excessmay be reasonable and consistent with current market conditions as determined by independent members of the conflicts committee of our board of directors.Substantial justification for a higher price could result from improvements to a property by the affiliate of our Manager or increases in market value of theproperty during the period of time the property is owned by the affiliate as evidenced by an appraisal of the property. In the event we were to acquireproperties from one of our affiliates, our proposed purchase prices will be based upon fair market values determined in good faith by our Manager, utilizing,for example, independent appraisals and competitive bidding if the assets are marketed to the public, with any actual or perceived conflicts of interestapproved by independent members of the conflicts committee of our board of directors. These prices may not be the subject of arm's-length negotiations,which could mean that the acquisitions may be on terms less favorable to us than those negotiated in an arm's-length transaction. When acquiring propertiesfrom our Manager and its affiliates, we may pay more for particular properties than we would have in an arm's-length transaction, which would reduce ourcash available for other investments or distribution to our stockholders.15Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.We may purchase real properties from persons with whom affiliates of our Manager have prior business relationships, which may impact the purchaseterms, and as a result, affect our stockholders' investment.If we purchase properties from third parties who have sold, or may sell, properties to our Manager or its affiliates, our Manager may experience aconflict between our current interests and its interest in preserving any ongoing business relationship with these sellers. As a result of this conflict, the termsof any transaction between us and such third parties may not reflect the terms that we could receive in the market on an arm's-length basis. If the terms wereceive in a transaction are less favorable to us, our results from operations may be adversely affected.The absence of arm's-length bargaining may mean that our agreements may not be as favorable to our stockholders as they otherwise could have been.Any existing or future agreements between us and our Manager or any of its respective affiliates were not and will not be reached through arm's-length negotiations. Thus, such agreements may require us to pay more than we would if we were using unaffiliated third parties. The ManagementAgreement, the operating partnership agreement of our Operating Partnership and the terms of the compensation to our Manager and its affiliates ordistributions to our Manager were not arrived at through arm's-length negotiations. The terms of the Management Agreement, the operating partnershipagreement of our Operating Partnership and similar agreements may not solely reflect our stockholders' best interest and may be overly favorable to the otherparty to such agreements including in terms of the substantial compensation to be paid to or the potential substantial distributions to these parties underthese agreements.Our Manager and its affiliates receive fees and other compensation based upon our investments, which may impact operating decisions, and as a result,affect our stockholders' investment.Daniel M. DuPree is our Chief Executive Officer and Chairman of the board of directors and the Chief Executive Officer of our Manager. Leonard A.Silverstein is the Company's President and Chief Operating Officer and Vice Chairman of the board of directors and the President and Chief Operating Officerof our Manager. As a result, Mr. DuPree and Mr. Silverstein have a direct interest in all fees paid to our Manager and are in a position to make decisions aboutour investments in ways that could maximize fees payable to our Manager and its affiliates. Some compensation is payable to our Manager whether or notthere is cash available to make distributions to our stockholders. To the extent this occurs, our Manager and its affiliates benefit from us retaining ownershipand leveraging our assets, while our stockholders may be better served by the sale or disposition of, or lack of leverage on, the assets. For example, becauseasset management fees payable to our Manager are based on total assets under management, including assets purchased using debt, our Manager may have anincentive to incur a high level of leverage in order to increase the total amount of assets under management. In addition, our Manager's ability to receive feesand reimbursements depends on our revenues from continued investment in real properties and real estate-related investments. Therefore, the interest of ourManager and its affiliates in receiving fees may conflict with the interest of our stockholders in earning a return on an investment in our Common Stock orPreferred Stock.If we invest in joint ventures, the objectives of our partners may conflict with our objectives.In accordance with our acquisition strategies, we may make investments in joint ventures or other partnership arrangements between us and affiliatesof our Manager or with unaffiliated third parties. We also may purchase properties in partnerships, co-tenancies or other co-ownership arrangements. Suchinvestments may involve risks not otherwise present when acquiring real estate directly, including, for example:•joint venturers may share certain approval rights over major decisions;•a co-venturer, co-owner or partner may at any time have economic or business interests or goals which are or which become inconsistent with ourbusiness interests or goals, including inconsistent goals relating to the sale of properties held in the joint venture or the timing of termination orliquidation of the joint venture;•a co-venturer, co-owner or partner in an investment might become insolvent or bankrupt;•we may incur liabilities as a result of an action taken by our co-venturer, co-owner or partner;•a co-venturer, co-owner or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives,including our policy with respect to qualifying and maintaining our qualification as a REIT;•disputes between us and our joint venturers may result in litigation or arbitration that would increase our expenses and prevent our officers anddirectors from focusing their time and effort on our business and result in subjecting the properties owned by the applicable joint venture toadditional risk; or•under certain joint venture arrangements, neither venture partner may have the power to control the venture, and an impasse could be reached whichmight have a negative influence on the joint venture.16Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.These events could result in, among other things, exposing us to liabilities of the joint venture in excess of our proportionate share of theseliabilities. The partition rights of each owner in a jointly owned property could reduce the value of each portion of the divided property. Moreover, there isan additional risk neither co-venturer will have the power to control the venture, and under certain circumstances, an impasse could be reached regardingmatters pertaining to the co-ownership arrangement, which might have a negative influence on the joint venture and decrease potential returns to ourstockholders. In addition, the fiduciary obligation that our Manager or our board of directors may owe to our partner in an affiliated transaction may make itmore difficult for us to enforce our rights.If we have a right of first refusal or buy/sell right to buy out a co-venturer, co-owner or partner, we may be unable to finance such a buy-out if itbecomes exercisable or we may be required to purchase such interest at a time when it would not otherwise be in our best interest to do so. If our interest issubject to a buy/sell right, we may not have sufficient cash, available borrowing capacity or other capital resources to allow us to elect to purchase an interestof a co-venturer subject to the buy/sell right, in which case we may be forced to sell our interest as the result of the exercise of such right when we wouldotherwise prefer to keep our interest. Finally, we may not be able to sell our interest in a joint venture if we desire to exit the venture.Risks Related to Investments in Real EstateOur real estate-related investments will be subject to the risks typically associated with real estate, which may have a material effect on our stockholders'investment.Our loans held for investment generally will be directly or indirectly secured by a lien on real property, or the equity interests in an entity that ownsreal property, that, upon the occurrence of a default on the loan, could result in our acquiring ownership of the property. We will not know whether the valuesof the properties ultimately securing our loans will remain at or above the levels existing on the dates of origination of those loans. If the values of theunderlying properties decline, our risk will increase because of the lower value of the security associated with such loans. In this manner, real estate valuescould impact the values of our loan investments. Any investments in mortgage-related securities, collateralized debt obligations and other real estate-relatedinvestments (including potential investments in real property) may be similarly affected by real estate property values. Therefore, our investments will besubject to the risks typically associated with real estate.The value of real estate may be adversely affected by a number of risks, including:•natural disasters, such as hurricanes, earthquakes, floods and sea rise;•climate change;•acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001;•adverse changes in national and local economic and real estate conditions;•an oversupply of (or a reduction in demand for) space in the areas where particular properties are located and the attractiveness of particularproperties to prospective residents or tenants;•changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance therewith and the potentialfor liability under applicable laws;•costs of complying with applicable environmental requirements and remediation and liabilities associated with environmental conditions affectingreal properties; and•the potential for uninsured or underinsured property losses.The value of each property is affected significantly by its ability to generate cash flow and net income, which in turn depends on the amount ofrental or other income that can be generated net of expenses required to be incurred with respect to the property. Many expenditures associated withproperties (such as operating expenses and capital expenditures) cannot be reduced when there is a reduction in income from the properties. These factorsmay have a material adverse effect on the ability of the borrowers to pay their loans, as well as on the value that we can realize from assets we own or acquire.Natural disasters could significantly reduce the value of our properties and our stockholders' investment.Natural disasters, including hurricanes, tornadoes, earthquakes, wildfires and floods could significantly reduce the value of our properties. While wewill attempt to obtain adequate insurance coverage for natural disasters, insurance may be too expensive, may have significant deductibles, or may notproperly compensate us for the long-term loss in value that a property may suffer if the area around it suffers a significant natural disaster. As a result, we maynot be compensated for the loss in value. Any diminution17Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.in the value of our properties or properties underlying an investment that is not fully reimbursed will reduce our profitability and adversely affect the value ofour stockholders' investment.We face possible risks associated with the physical effects of climate change.The physical effects of climate change could have a material adverse effect on our properties, operations and business, particularly our propertiesalong the East Coast and in Texas. To the extent climate change causes changes in weather patterns, our markets could experience increases in stormintensity and rising sea-levels. Over time, these conditions could result in declining demand for apartments or our inability to operate the affected propertiesat all. Climate change may also have indirect effects on our business by increasing the cost of (or making unavailable) property insurance on terms we findacceptable. There can be no assurance that climate change will not have a material adverse effect on our properties, operations or business.We may suffer losses that are not covered by insurance.If we suffer losses that are not covered by insurance or that are in excess of insurance coverage, we could lose invested capital and anticipatedprofits. We intend to obtain comprehensive insurance for our properties, including casualty, liability, fire, extended coverage and rental loss customarily, thatis of the type obtained for similar properties and in amounts which our Manager determines are sufficient to cover reasonably foreseeable losses, and withpolicy specifications and insured limits that we believe are adequate and appropriate under the circumstances. Material losses may occur in excess ofinsurance proceeds with respect to any property as insurance proceeds may not provide sufficient resources to fund the losses. However, there are types oflosses, generally of a catastrophic nature, such as losses due to acts of war, earthquakes, floods, wind, pollution, environmental matters or terrorism which areeither uninsurable, not economically insurable, or may be insured subject to material limitations, such as large deductibles or co-payments.Because of our inability to obtain specialized coverage at rates that correspond to our perceived level of risk, we may not obtain insurance for actsof terrorism. We will continue to evaluate the availability and cost of additional insurance coverage from the insurance market. If we decide in the future topurchase insurance for terrorism, the cost could have a negative impact on our results of operations. If an uninsured loss or a loss in excess of insured limitsoccurs on a property, we could lose our capital invested in the property, as well as the anticipated future revenues from the property and, in the case of debtthat is recourse to us, would remain obligated for any mortgage debt or other financial obligations related to the property. Any loss of this nature wouldadversely affect us. Although we intend to adequately insure our properties, we can offer no assurance that we will successfully do so.Compliance with the governmental laws, regulations and covenants that are applicable to our properties, including permit, license and zoningrequirements, may adversely affect our ability to make future acquisitions or renovations, result in significant costs or delays and adversely affect ourgrowth strategy.Our properties are subject to various covenants and local laws and regulatory requirements, including permitting and licensing requirements. Localregulations, including municipal or local ordinances, zoning restrictions and restrictive covenants (some of which may be imposed by communitydevelopers), may restrict the use of our properties and may require us to obtain approval from local officials or community standards organizations at anytime with respect to our properties, including prior to acquiring a property or when undertaking renovations of any of our existing properties. Among otherthings, these restrictions may relate to fire and safety, seismic, asbestos-containing materials abatement or management or hazardous material abatementrequirements. We cannot assure our stockholders that existing regulatory policies will not adversely affect us or the timing or cost of any future acquisitionsor renovations, or that additional regulations will not be adopted that would increase such delays or result in additional costs. Our growth strategy may bematerially and adversely affected by our ability to obtain permits, licenses and zoning approvals. Our failure to obtain such permits, licenses and zoningapprovals could have a material adverse effect on our business, financial condition and results of operations.18Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Compliance or failure to comply with the Americans with Disabilities Act or other safety regulations and requirements could result in substantial costs.The Americans with Disabilities Act generally requires that public buildings, including “public accommodations," be made accessible to disabledpersons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants. If, under theAmericans with Disabilities Act, we are required to make substantial alterations and capital expenditures in one or more of our properties or in properties weacquire, including the removal of access barriers, it could adversely affect our financial condition and results of operations, as well as the amount of cashavailable for distribution to our stockholders. Our properties are subject to various federal, state and local regulatory requirements, such as state and local fireand life safety requirements. If we fail to comply with these requirements, we could incur fines or private damage awards. We do not know whether existingrequirements will change or whether compliance with future requirements will require significant unanticipated expenditures that will affect our cash flowand results of operations.Rising expenses could reduce cash flow and funds available for future acquisitions, which may materially affect cash available for distributions.Our real estate assets may be subject to increases in tax rates, assessed property values, utility costs, operating expenses, insurance costs, repairs andmaintenance, administrative and other expenses. Some of the leases on our properties may require the resident or tenant to pay all or a portion of utility costs;however, significant utility costs are borne by us. Such increased expenses could adversely affect funds available for future acquisitions or cash available fordistributions.Failure to generate sufficient cash flows from operations may reduce distributions to stockholders.We intend to rely primarily on our cash flow from operations to make distributions to our stockholders. The cash flow from equity investments inour real estate assets depends on the amount of revenue generated and expenses incurred in operating our assets. The revenue generated and expensesincurred in operating our assets depends on many factors, some of which are beyond our control. For instance, rents from our properties may not increase asexpected or the real estate-related investments we purchase may not generate the anticipated returns. If our investments do not generate revenue sufficient tomeet our operating expenses, debt service and capital expenditures, our cash flows and ability to make distributions to our stockholders will be adverselyaffected.If we purchase assets at a time when the real estate market is experiencing substantial influxes of capital investment and competition for properties, thereal estate we purchase may not appreciate or may decrease in value.The real estate market may experience substantial influxes of capital from investors. This substantial flow of capital, combined with significantcompetition for the acquisition of real estate, may result in inflated purchase prices for such assets and compression of capitalization rates. To the extent wepurchase real estate in such an environment, we are subject to the risk that, if the real estate market subsequently ceases to attract the same level of capitalinvestment, or if the number of companies seeking to acquire such assets decreases, our returns will be lower and the value of our assets may not appreciate ormay decrease significantly below the amount we paid for such assets.We may be unable to sell a property if or when we decide to do so, which could adversely impact our ability to make distributions to our stockholders.In connection with the acquisition of a property, we may agree on restrictions that prohibit the sale of that property for a period of time or imposeother restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. Even absent such restrictions, the real estate marketis affected by many factors that are beyond our control, including general economic conditions, availability of financing, interest rates and supply anddemand. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by aprospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property orreal estate-related asset. If we are unable to sell a property or real estate-related asset when we determine to do so, it could have a significant adverse effect onour cash flow and results of operations. As a result, we may not have funds to make distributions to our stockholders.19Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.We may have difficulty selling real estate investments, and our ability to distribute all or a portion of the net proceeds from such sale to our stockholdersmay be limited.Real estate investments are relatively illiquid, and as a result, we will have a limited ability to vary our portfolio in response to changes ineconomic or other conditions. We also will have a limited ability to sell assets in order to fund working capital and similar capital needs. When we sell any ofour properties, we may not realize a gain on such sale. We may elect not to distribute any proceeds from the sale of properties to our stockholders and we mayuse such proceeds to:•purchase additional properties;•repay debt, if any;•buy out the interests of any co-venturers or other partners in any joint venture in which we are a party;•create working capital reserves; or•make repairs, maintenance, tenant improvements or other capital improvements or expenditures to our remaining properties.We may not make a profit if we sell a property, which could adversely impact our ability to make cash distributions to our stockholders.The prices that we can obtain when we determine to sell a property will depend on many factors that are presently unknown, including theproperty's operating performance, tax treatment of real estate investments, demographic trends in the area and available financing. There is a risk that we willnot recover all or a portion of our investment in a property. Accordingly, our stockholders' ability to recover all or any portion of their investment under suchcircumstances will depend on the amount of funds so realized and claims to be satisfied therefrom.Our ability to sell our properties also may be limited by our need to avoid a 100% penalty tax that is imposed on gain recognized by a REIT fromthe sale of property characterized as dealer property. In order to ensure that we avoid such characterization we may be required to hold our properties for aminimum period of time and comply with certain other requirements in the Code, or possibly hold some properties through taxable REIT subsidiaries, orTRSs, that must pay full corporate-level income taxes.We may incur foreseen or unforeseen liabilities in connection with properties we acquire.Our anticipated acquisition activities are subject to many risks. We may acquire properties that are subject to liabilities or that have problemsrelating to their environmental condition, state of title, physical condition or compliance with zoning laws, building codes or other legal requirements. Ineach case, our acquisition may be without any, or with only limited, recourse with respect to unknown liabilities or conditions. As a result, if any liabilitywere asserted against us relating to those properties or entities, or if any adverse condition existed with respect to the properties or entities, we might have topay substantial sums to settle or cure it, which could adversely affect our cash flow and operating results. However, some of these liabilities may be coveredby insurance. In addition, we typically perform customary due diligence regarding each property or entity we acquire. We also attempt to obtain appropriaterepresentations and undertakings (including, where appropriate, indemnification) from the sellers of the properties or entities we acquire, although it ispossible that the sellers may not have the resources to satisfy any applicable undertakings or indemnification obligations if a claim is made. Unknownliabilities to third parties with respect to properties or entities acquired might include, without limitation:•liabilities for property damage and remediation of undisclosed environmental contamination;•claims by residents or other persons dealing with the former owners of the properties;•liabilities incurred in the ordinary course of business; and•claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.Such liabilities could cause losses that adversely affect our ability to make distributions to our stockholders.The costs of compliance with environmental laws and regulations and other governmental laws and regulations may adversely affect our income and thecash available for any distributions.All real property and the operations conducted on real property are subject to certain federal, state and local laws and regulations relating toenvironmental protection and human health and safety. Such federal laws might include: the National Environmental Policy Act; the ComprehensiveEnvironmental Response, Compensation, and Liability Act; the Solid Waste Disposal Act as amended by the Resource Conservation and Recovery Act; theFederal Water Pollution Control Act; the Federal20Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Clean Air Act; the Toxic Substances Control Act, the Emergency Planning and Community Right to Know Act; and the Hazard Communication Act. Theselaws and regulations generally govern wastewater discharges, air emissions, the regulation and removal of underground and above-ground storage tanks, theuse, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination, including of off-site third partyowned disposal sites. As is the case with community and neighborhood shopping centers, some of our centers had on-site dry cleaning and/or on-site gasolineretail facilities and these prior uses could potentially increase our environmental liability exposure. Some of these laws and regulations may impose joint andseveral liability on residents, owners or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality ofthe original disposal. In addition, the presence of certain regulated substances, or the failure to properly remediate these substances, may adversely affect ourability to sell or rent the property or to use the property as collateral for future borrowing.Indoor air quality issues, including the presence of mold, have been highlighted in the media and the industry is seeing claims from lessees rising.Due to the recent increase in the prevalence of mold claims and given that the law relating to the regulation of mold is unsettled and subject to change, wecould incur losses from claims relating to the presence of, or exposure to, mold or other microbial organisms, particularly if we are unable to maintainadequate insurance to cover such losses. We also may incur unexpected expenses relating to the abatement of mold on properties that we acquire.Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require material expenditures by us. Wecannot assure our stockholders that future laws, ordinances or regulations will not impose any material environmental liability, or that the currentenvironmental condition of our properties will not be affected by the activities of residents, existing conditions of the land, operations in the vicinity of theproperties, or the activities of unrelated third parties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations withwhich we may be required to comply. Failure to comply with applicable laws and regulations could result in fines and/or damages, suspension of personnel ofour Manager and/or other sanctions.Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results.Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property maybe liable for the cost of removal or remediation of hazardous or regulated substances on, under, in or about such property. The costs of investigation, removalor remediation of such substances could be substantial. Those laws may impose liability whether or not the owner or operator knew of, or was responsible for,the presence of the substances.Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and compliance withthose restrictions may require substantial expenditures. Environmental laws provide for sanctions in the event of noncompliance and may be enforced bygovernmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles govern the presence,maintenance, removal and disposal of certain building materials, including mold, asbestos and lead-based paint.The cost of defending against such claims of liability, of compliance with environmental requirements, of remediating any contaminated property,or of paying personal injury claims could materially adversely affect our business, assets or results of operations and, consequently, the amounts available fordistribution to our stockholders.We cannot assure our stockholders that properties which we acquire will not have any material environmental conditions, liabilities or complianceconcerns. Accordingly, we have no way of determining at this time the magnitude of any potential liability to which we may be subject arising out ofenvironmental conditions or violations with respect to the properties we may purchase.We may be unable to secure funds for future capital improvements, which could adversely impact our ability to make distributions to our stockholders.When residents or tenants do not renew their leases or otherwise vacate their space, in order to attract replacement residents or tenants, we may berequired to expend funds for capital improvements to the vacated apartment units or leased spaces and common areas. In addition, we may require substantialfunds to renovate a property in order to sell it, upgrade it or reposition it in the market. If we have insufficient capital reserves, we will have to obtainfinancing from other sources. We typically establish capital reserves in an amount we, in our discretion, believe is necessary. A lender also may requireescrow of capital reserves separately maintained from any reserves we establish. If these reserves or any reserves otherwise established are designated for otheruses or are insufficient to meet our cash needs, we may have to obtain financing from either affiliated or unaffiliated sources to fund our cash requirements.We cannot assure our stockholders that sufficient financing will be available or, if available, will be available on economically feasible terms or on termsacceptable to us. Moreover, certain reserves required by lenders may be21Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.designated for specific uses and may not be available for capital purposes such as future capital improvements. Additional borrowing will increase ourinterest expense; therefore, our financial condition and our ability to make distributions to our stockholders may be adversely affected.We may not have control over costs arising from rehabilitation of properties.We may elect to acquire properties which require rehabilitation. In particular, we have acquired, and may continue to acquire, “affordable”properties that we will rehabilitate and convert to market rate properties. Consequently, we may retain independent general contractors to perform the actualphysical rehabilitation work and will be subject to risks in connection with a contractor's ability to control the rehabilitation costs, the timing of completionof rehabilitation, and a contractor's ability to build and rehabilitate in conformity with plans and specifications.The profitability of our acquisitions is uncertain.We intend to acquire properties selectively. Acquisition of properties entails risks that investments will fail to perform in accordance withexpectations. In undertaking these acquisitions, we will incur certain risks, including the expenditure of funds on, and the devotion of management's time to,transactions that may not come to fruition. Additional risks inherent in acquisitions include risks that the properties will not achieve anticipated occupancylevels and that estimates of the costs of improvements to bring an acquired property up to our standards may prove inaccurate.Competition with third parties in acquiring properties and other assets may reduce our profitability and the returns to our stockholders.We compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurancecompany investment accounts, other REITs, real estate limited partnerships and other entities engaged in real estate investment activities. Many of theseentities have significant financial and other resources, including operating experience, allowing them to compete effectively with us. Competitors withsubstantially greater financial resources than us may be able to accept more risk than we can effectively manage. In addition, those competitors that are notREITs may be at an advantage to the extent they can utilize working capital to finance projects, while we (and our competitors that are REITs) will berequired by the annual distribution provisions under the Code to distribute significant amounts of cash from operations to our stockholders.Some or all of our properties have incurred, and will incur, vacancies, which may result in reduced revenue and resale value, a reduction in cash availablefor distribution and a diminished return to our stockholders.Our properties have incurred, and will incur, vacancies. If vacancies of a significant level continue for a long period of time, we may suffer reducedrevenues resulting in lower cash distributions to our stockholders. In addition, the resale value of the property could be diminished because the market valueof a particular property will depend principally upon the value of the leases of such property.We may rely significantly on repayment guarantors of our real estate loan investments and, therefore, could be subject to credit concentration that makesus more susceptible to adverse events with respect to such guarantors.The repayment of amounts owed to us under certain of our real estate loan investments may be partially guaranteed by the principals of theborrowers. If it were necessary to enforce a guaranty of completion or a guaranty of repayment, our rights under such enforcement are limited by rights heldby the senior lender pursuant to intercreditor agreements we have in place. Therefore, the failure to perform by the borrowers and such guarantors is likely tohave a material adverse effect on our results of operations and financial condition.22Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.We are subject to geographic concentrations that make us more susceptible to adverse events with respect to certain geographic areas.We are subject to geographic concentrations, the carrying values of which are as follows as of December 31, 2018: Carrying value of realestate assets and realestate related loans, inmillions: Percentage Florida$933.7 25.0%Georgia921.2 24.7%North Carolina514.7 13.8%Texas513.5 13.7%Alabama176.7 4.7%Virginia171.9 4.6%Tennessee157.7 4.2%California94.9 2.5%South Carolina80.0 2.2%Arizona47.8 1.3%Kansas41.3 1.1%Pennsylvania40.8 1.1%Kentucky34.6 0.9%Mississippi6.1 0.2% Total$3,734.9 100.0%Any economic downturn or other adverse condition in one or more of these states, or in any other state in which we may have a significantconcentration in the future, could result in a material reduction of our cash flows or material losses to us.Failure to succeed in new markets or sectors may have adverse consequences on our performance.We may make acquisitions outside of our existing market areas if appropriate opportunities arise. Our Manager's or any of its affiliates' historicalexperience in their existing markets does not ensure that we will be able to operate successfully in new markets, should we choose to enter them. We may beexposed to a variety of risks if we choose to enter new markets, including an inability to accurately evaluate local market conditions, to identify appropriateacquisition opportunities, to hire and retain key personnel, and a lack of familiarity with local governmental and permitting procedures. In addition, we mayabandon opportunities to enter new markets that we have begun to explore for any reason and may, as a result, fail to recover expenses already incurred.Acquiring or attempting to acquire multiple properties in a single transaction may adversely affect our operations.We are likely to acquire multiple properties in a single transaction. Such portfolio acquisitions are more complex and expensive than single-property acquisitions, and the risk that a multiple-property acquisition does not close may be greater than in a single-property acquisition. Portfolioacquisitions also may result in us owning investments in geographically dispersed markets, placing additional demands on our ability to manage theproperties in the portfolio. In addition, a seller may require thata group of properties be purchased as a package even though we may not want to purchase one or more properties in the portfolio. In these situations, if weare unable to identify another person or entity to acquire the unwanted properties, we may be required to operate, or attempt to dispose of, these properties.We may be required to accumulate a large amount of cash in order to acquire multiple properties in a single transaction. We would expect that the returns thatwe can earn on such cash will be less than the ultimate returns on real property, and therefore, accumulating such cash could reduce our funds available fordistributions. Any of the foregoing events may have an adverse effect on our operations.Our revenue and net income may vary significantly from one period to another due to investments in opportunity-oriented properties and portfolioacquisitions, which could increase the variability of our cash available for distributions.We may make investments in opportunity-oriented properties in various phases of development, redevelopment or repositioning and portfolioacquisitions, which may cause our revenues and net income to fluctuate significantly from one period23Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.to another. Projects do not produce revenue while in development or redevelopment. During any period when our projects in development or redevelopmentor those with significant capital requirements increase without a corresponding increase in stable revenue-producing properties, our revenues and net incomelikely will decrease. Many factors may have a negative impact on the level of revenues or net income produced by our portfolio of investments, includinghigher than expected construction costs, failure to complete projects on a timely basis, failure of the properties to perform at expected levels upon completionof development or redevelopment, and increased borrowings necessary to fund higher than expected construction or other costs related to the project. Further,our net income and stockholders' equity could be negatively affected during periods with large portfolio acquisitions, which generally require large cashoutlays and may require the incurrence of additional financing. Any such reduction in our revenues and net income during such periods could cause aresulting decrease in our cash available for distributions during the same periods.We may obtain properties with lock-out provisions, or agree to such provisions in connection with obtaining financing, which may prohibit us from sellinga property, or may require us to maintain specified debt levels for a period of years on some properties.We may agree to obtain certain properties from contributors who contribute their direct or indirect interest in such properties to our OperatingPartnership in exchange for operating partnership units and agree to restrictions on sales or refinancing, called “lock-out” provisions, that are intended topreserve favorable tax treatment for the contributors of such properties and otherwise agree to provide the indemnities to contributions. Additionally, we mayagree to lock-out provisions in connection with obtaining financing for the acquisition of properties. Furthermore, we may agree to make a certain amount ofdebt available for these contributors to guarantee in order to preserve their favorable tax treatment. Lock-out provisions and the consequences of related taxindemnities could materially restrict us from selling, conveying, transferring otherwise disposing of all or any portion of the interest in these properties in ataxable transaction or from refinancing properties. This would affect our ability to turn our investments into cash and thus affect cash available to makedistributions to our stockholders. Lock-out provisions could impair our ability to take actions during the lock-out period that would otherwise be in the bestinterests of our stockholders, and therefore, might have an adverse impact on the value of our Common Stock. In particular, lock-out provisions couldpreclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition orchange in control might be in the best interests of our stockholders.Risks Associated with Debt FinancingWe have significant debt, which could have important adverse consequences.As of December 31, 2018, we had outstanding debt of approximately $2.4 billion. This indebtedness could have important consequences, including:•if a property is mortgaged to secure payment of indebtedness, and if we are unable to meet our mortgage obligations, we could sustain a loss as aresult of foreclosure on the mortgaged property;•our vulnerability to general adverse economic and industry conditions is increased; and•our flexibility in planning for, or reacting to, changes in business and industry conditions is limited.The mortgages on our properties subject to secured debt, our Revolving Credit Facility and our Interim Term Loan contain customary restrictions,requirements and other limitations, as well as certain financial and operating covenants, including maintenance of certain financial ratios. Maintainingcompliance with these provisions could limit our financial flexibility. A default in these provisions, if uncured, could require us to repay the indebtednessbefore the scheduled maturity date, which could adversely affect our liquidity and increase our financing costs.We may be unable to renew, repay, or refinance our outstanding debt.We are subject to the risk that indebtedness on our properties or our unsecured indebtedness will not be renewed, repaid, or refinanced when due orthe terms of any renewal or refinancing will not be as favorable as the existing terms of such indebtedness. If we are unable to refinance our indebtedness onacceptable terms, or at all, we might be forced to dispose of one or more of the properties on disadvantageous terms, which might result in losses to us. Suchlosses could have a material adverse effect on us and our ability to make distributions to our stockholders and pay amounts due on our debt. Furthermore, if aproperty is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, the mortgagee could foreclose on the property,appoint a receiver and exercise rights under an assignment of rents and leases, or pursue other remedies, all with a consequent loss of our revenues and assetvalue. Foreclosures could also create taxable income without accompanying cash proceeds, thereby hindering our ability to meet the REIT distributionrequirements of the Code.24Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.We plan to incur additional mortgage indebtedness and other borrowings, which may increase our business risks. We intend to acquire propertiessubject to existing financing or by borrowing new funds. In addition, we may incur or increase our mortgage debt by obtaining loans secured by selected, orby all of our, real properties to obtain funds to acquire additional real properties and/or make capital improvements to properties. We also may borrow funds,if necessary, to satisfy the requirement that we generally distribute to stockholders as dividends at least 90% of our annual REIT taxable income (excludingnet capital gain), or otherwise as is necessary or advisable to assure that we maintain our qualification as a REIT.We intend to incur mortgage debt on a particular property only if we believe the property's projected cash flow is sufficient to service the mortgagedebt. However, if there is a shortfall in cash flow requiring us to use cash from other sources to make the mortgage payments on the property, then the amountavailable for distributions to stockholders may be affected. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtednesssecured by properties may result in foreclosure actions initiated by lenders and our loss of the property securing the loan which is in default. For tax purposes,a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured bythe mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income onforeclosure, but would not receive any cash proceeds. We may, in some circumstances, give a guaranty on behalf of an entity that owns one or more of ourproperties. In these cases, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, there is a risk that more than one property may be affected by a default.Any mortgage debt which we place on properties may contain clauses providing for prepayment penalties. If a lender invokes these penalties uponthe sale of a property or the prepayment of a mortgage on a property, the cost to us to sell the property could increase substantially, and may even beprohibitive. This could lead to a reduction in our income, which would reduce cash available for distribution to stockholders and may prevent us fromborrowing more money.We may incur additional indebtedness, which may harm our financial position and cash flow and potentially impact our ability to pay dividends on thePreferred Stock and our Common Stock.Our governing documents do not have limitations on the amount of leverage we may use. We may incur additional indebtedness and become morehighly leveraged, which could harm our financial position and potentially limit our cash available to pay dividends due to debt covenant restrictions and/orresulting lower amounts of cash from operating activities. As a result, we may not have sufficient funds remaining to satisfy our dividend obligations relatingto our Preferred Stock and our Common Stock if we incur additional indebtedness.Interest-only indebtedness may increase our risk of default and ultimately may reduce our funds available for distributions to our stockholders.We also may finance our property acquisitions using interest-only mortgage indebtedness for all or a portion of the term. During the interest-onlyperiod, the amount of each scheduled payment will be less than that of a traditional amortizing mortgage loan. The principal balance of the mortgage loanwill not be reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal during this period. After the interest-only period, we will be required either to make scheduled payments of amortized principal and interest or to make a lump-sum or “balloon” payment atmaturity. These required principal or balloon payments will increase the amount of our scheduled payments and may increase our risk of default under therelated mortgage loan. If the mortgage loan has an adjustable interest rate, the amount of our scheduled payments also may increase at a time of rising interestrates. Increased payments and substantial principal or balloon maturity payments or prepayment penalties will reduce the funds available for distribution toour stockholders because cash otherwise available for distribution will be required to pay principal and interest associated with these mortgage loans. Whileour intention and practice has been to place interest rate caps on our floating rate mortgages, these caps will be at rates above current rates.We may change our operational policies (including our investment guidelines, strategies and policies and the targeted assets in which we invest) with theapproval of our board of directors but without stockholder consent or notice at any time, which may adversely affect the market value of our CommonStock, our results of operations and cash flows and our ability to pay dividends to our stockholders.Our board of directors determines our operational policies and may amend or revise our policies (including our policies with respect to the targetedassets in which we invest, dispositions, growth, operations, indebtedness, capitalization and dividends) or approve transactions that deviate from thesepolicies at any time, without a vote of, or notice to, our stockholders. We may change our investment guidelines and our strategy at any time with theapproval of our board of directors, but without the consent25Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.of, or notice to, our stockholders, which could result in us making investments that are different in type from, and possibly riskier than, the investments wecurrently invest in.If mortgage debt is unavailable at reasonable rates, it may make it difficult for us to finance or refinance properties, which could reduce the number ofproperties we can acquire, our cash flows from operations and the amount of cash distributions we can make.If we are unable to borrow monies on terms and conditions that we find acceptable, we likely will have to reduce the number of properties we canpurchase, and the return on the properties we do purchase may be lower. If we place mortgage debt on properties, we run the risk of being unable to refinancethe properties when the debt becomes due or of being unable to refinance on favorable terms. If interest rates are higher when we refinance the properties, ourincome could be reduced. As such, we may find it difficult, costly or impossible to refinance indebtedness which is maturing. If any of these events occur, ourinterest cost would increase as a result, which would reduce our cash flow. This, in turn, could reduce cash available for distribution to our stockholders andmay hinder our ability to raise capital by issuing more stock or borrowing more money. If we are unable to refinance maturing indebtedness with respect to aparticular property and are unable to pay the same, then the lender may foreclose on such property.Financial and real estate market disruptions could adversely affect the multifamily property sector's ability to obtain financing from Freddie Mac andFannie Mae, which could adversely impact us.Fannie Mae, Freddie Mac and HUD/FHA are major sources of financing for the multifamily sector and both have historically experienced losses dueto credit-related expenses, securities impairments and fair value losses. If new U.S. government regulations (i) heighten these agencies' underwritingstandards, (ii) adversely affect interest rates, or (iii) reduce the amount of capital they can make available to the multifamily sector, it could reduce or removeentirely a vital resource for multifamily financing. Any potential reduction in loans, guarantees and credit-enhancement arrangements from these agenciescould jeopardize the effectiveness of the multifamily sector's available financing and decrease the amount of available liquidity and credit that could be usedto acquire and diversify our portfolio of multifamily assets.Volatility in and regulation of the commercial mortgage-backed securities market has limited and may continue to impact the pricing of secured debt.A lack of volume in the commercial mortgage-backed securities market could result in the following adverse effects on our incurrence of secureddebt, which could have a materially negative impact on our financial condition, results of operations, cash flow and cash available for distribution,including: •the general availability of loan proceeds/originators:•higher loan spreads;•tighter loan covenants;•reduced loan to value ratios and resulting borrower proceeds; and•higher amortization and reserve requirements.The Company could be negatively impacted by the condition of Fannie Mae or Freddie Mac and by changes in government support for multi-familyhousing.Fannie Mae and Freddie Mac are a major source of financing for multifamily real estate in the United States. The Company utilizes loan programssponsored by these entities as a key source of capital to finance its growth and its operations. In September 2008, the U.S. government assumed control ofFannie Mae and Freddie Mac and placed both companies into a government conservatorship under the Federal Housing Finance Agency. In December 2009,the U.S. Treasury increased its financial support for these conservatorships. In February 2011, the Obama administration released its blueprint for windingdown Fannie Mae and Freddie Mac and for reforming the system of housing finance. In June 2013, a bipartisan group of senators proposed an overhaul of thehousing finance system which would wind down Fannie Mae and Freddie Mac within five years; in August 2013, President Obama announced his support forthis legislation. This legislation was ultimately abandoned. Any decision or action by the U.S. government to eliminate or downscale Fannie Mae or FreddieMac or to reduce government support for multifamily housing more generally may adversely affect interest rates, capital availability, development ofmultifamily communities and the value of multifamily residential real estate and, as a result, may adversely affect the Company and its growth andoperations.26Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.High levels of debt or increases in interest rates could increase the amount of our loan payments, which could reduce the cash available for distribution tostockholders.As mentioned above, we incur and expect to continue to incur debt. Higher debt levels would cause us to incur higher interest charges, would resultin higher debt service payments and could be accompanied by restrictive covenants. Interest we pay could reduce cash available for distribution tostockholders. Additionally, if we incur variable rate debt, increases in interest rates would increase our interest costs, which would reduce our cash flow andour ability to make distributions to our stockholders. If we need to repay existing debt during periods of rising interest rates, we could be required to liquidateone or more of our investments in properties at times which may not permit realization of the maximum return on such investments and could result in a loss.Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to ourstockholders.In providing financing to us, a lender may impose restrictions on us that affect our ability to incur additional debt, make certain investments, reduceliquidity below certain levels, make distributions to our stockholders and otherwise affect our distribution and operating policies. In general, we expect ourloan agreements to restrict our ability to encumber or otherwise transfer our interest in the respective property without the prior consent of the lender. Suchloan documents may contain other negative covenants that may limit our ability to discontinue insurance coverage, replace our Manager or impose otherlimitations. Any such restriction or limitation may have an adverse effect on our operations and our ability to make distributions to our stockholders. Further,such restrictions could make it difficult for us to satisfy the requirements necessary to maintain our qualification as a REIT.Risks Related to Our Real Estate-Related InvestmentsOur investments in, or originations of, senior debt or subordinate debt and our investments in membership or partnership interests in entities that own realestate assets will be subject to the specific risks relating to the particular company and to the general risks of investing in real estate-related loans andsecurities, which may result in significant losses.We may invest in, or originate, senior debt or subordinate debt and invest in membership or partnership interests in entities that own real estateassets. These investments will involve special risks relating to the particular company, including its financial condition, liquidity, results of operations,business and prospects. In particular, the debt securities may not be collateralized and also may be subordinated to the entity's other obligations. We arelikely to invest in debt securities of companies that are not rated or are rated non-investment grade by one or more rating agencies. Investments that are notrated or are rated non-investment grade have a higher risk of default than investment grade rated assets and therefore may result in losses to us. We have notadopted any limit on such investments.These investments also will subject us to the risks inherent with real estate investments referred to previously, including the risks described withrespect to multifamily and retail properties and other real estate-related investments and similar risks, including:•risks of delinquency and foreclosure, and risks of loss in the event thereof;•the dependence upon the successful operation of, and net income from, real property;•risks generally incident to interests in real property; and•risks specific to the type and use of a particular propertyThese risks may adversely affect the value of our investments in entities that own real estate assets and the ability of our borrowers thereof to makeprincipal and interest payments in a timely manner, or at all, and could result in significant losses.Our real estate loan assets will involve greater risks of loss than senior loans secured by income-producing properties.We may originate (in connection with a forward purchase or option to purchase contract or otherwise) or acquire real estate loans in entities that ownor are developing multifamily properties or other real estate-related investments which take the form of subordinated loans secured by second mortgages onthe underlying property or loans secured by a pledge of the ownership interests of either the entity owning the property or a pledge of the ownership interestsof the entity that owns the interest in the entity owning the property. These types of assets involve a higher degree of risk than long-term senior mortgagelending secured by income-producing real property because the loan may become unsecured as a result of foreclosure by the senior lender and because it is insecond position and there may not be adequate equity in the property. In the event of a bankruptcy of the entity27Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.providing the pledge of its ownership interests as security, we may not have full recourse to the assets of such entity, or the assets of the entity may not besufficient to satisfy our real estate loan. If a borrower defaults on our real estate loan or debt senior to our loan, or in the event of a borrower bankruptcy, ourreal estate loan will be satisfied only after the senior debt. We may be unable to enforce guaranties of payment and/or performance given as security for somereal estate loans. As a result, we may not recover some or all of our initial expenditure. Our real estate loans partially finance the construction of real estateprojects and so involve additional risks inherent in the construction process, such as adherence to budgets and construction schedules. In addition,subordinate loans may have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the property and increasing the risk ofloss of principal. Significant losses related to our real estate loans would result in operating losses for us and may limit our ability to make distributions to ourstockholders.Risks Related to our Investments in Multifamily CommunitiesEconomic conditions may adversely affect the multifamily real estate market and our income.A multifamily property's income and value may be adversely affected by international, national and regional economic conditions. Currently, theU.S. real estate market is enjoying relatively strong performance with generally positive conditions in most sectors. International markets are experiencingincreased levels of volatility due to a combination of many factors, including decreased economic growth, especially in China, limited access to creditmarkets and volatility in the equity markets both domestically and internationally. If such conditions persist, the real estate industry may experience asignificant decline in business caused by a reduction in overall renters. The current economy and improved unemployment rates also may also deterioratedue to these and other economic factors. If the economy domestically or abroad does experience a meaningful downturn it could have an adverse effect onour operations if they cause the residents occupying the multifamily properties we acquire to cease making rent payments to us.In addition, local real estate conditions such as an oversupply of properties or a reduction in demand for properties, availability of "for sale"properties, competition from other similar properties, our ability to provide adequate maintenance, insurance and management services, increased operatingcosts (including real estate taxes), the attractiveness and location of the property and changes in market rental rates may adversely affect a property's incomeand value. The continued rise in energy costs and other property-level expenses could result in higher operating costs, which may adversely affect our resultsfrom operations. In addition, local conditions in the markets in which we own or intend to own properties may significantly affect occupancy or rental rates atsuch properties. The risks that may adversely affect conditions in those markets include: layoffs, business closings, relocations of significant local employersand other events negatively impacting local employment rates and the local economy; an oversupply of, or a lack of demand for, apartments; a decline inhousehold formation; the inability or unwillingness of residents to pay rent increases; and rent control, rent stabilization and other housing laws, which couldprevent us from raising rents.We cannot predict if the current strength in the multifamily real estate market will continue. Therefore, to the extent that there are adverse economicconditions in the multifamily market, such conditions could result in a reduction of our income and cash available for distributions and thus affect theamount of distributions we can make to our stockholders.We must comply with the Fair Housing Amendments Act of 1988, or the FHAA, and failure to comply may affect cash available for distributions.We must comply with the FHAA, which requires that apartment communities first occupied after March 13, 1991 be accessible to handicappedresidents and visitors. Compliance with the FHAA could require removal of structural barriers to handicapped access in a community, including the interiorsof apartment units covered under the FHAA. Recently there has been heightened scrutiny of multifamily housing communities for compliance with therequirements of the FHAA and the ADA and an increasing number of substantial enforcement actions and private lawsuits have been brought againstapartment communities to ensure compliance with these requirements. Noncompliance with the FHAA could result in the imposition of fines, awards ofdamages to private litigants, payment of attorneys' fees and other costs to plaintiffs, substantial litigation costs and substantial costs of remediation.Short-term apartment leases expose us to the effects of declining market rents, which could adversely impact our ability to make distributions to ourstockholders.We expect that most of our apartment leases will be for terms of thirteen months or less. Because these leases generally permit the residents to leaveat the end of the lease term without any penalty, our rental revenues may be impacted by declines in market rents more quickly than if our leases were forlonger terms.28Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.We will face competition from other apartment communities and the affordability and accessibility of single-family homes, which may limit ourprofitability and the returns to our stockholders.The multifamily apartment industry is highly competitive. This competition could reduce occupancy levels and revenues at our multifamilycommunities, which would adversely affect our operations. Our competitors include those in other apartment communities both in the immediate vicinitywhere our multifamily communities will be located and the broader geographic market. Such competition also may result in overbuilding of apartmentcommunities, causing an increase in the number of apartment units available and potentially decreasing our occupancy and apartment rental rates. We alsomay be required to expend substantial sums to attract new residents. The resale value of the property could be diminished because the market value of aparticular property will depend principally upon the value of the leases of such property. In addition, increases in operating costs due to inflation may not beoffset by increased apartment rental rates. Further, costs associated with real estate investment, such as utilities and maintenance costs, generally are notreduced when circumstances cause a reduction in income from the investment. These events would cause a significant decrease in cash flow and could causeus to reduce the amount of distributions to our stockholders.Furthermore, apartment communities we acquire most likely compete, or will compete, with numerous housing alternatives in attracting residents,including single- and multi-family homes available to rent or purchase. Competitive housing in a particular area and the increasing affordability of single-and multi-family homes available to rent or buy caused by declining mortgage interest rates and government programs to promote home ownership couldadversely affect our ability to retain our residents, lease apartment units and increase or maintain rental rates. The foregoing factors may encourage potentialrenters to purchase residences rather than renting an apartment, thereby causing a decline in the pool of available renters for our properties.Risks Related to our Investments in Student Housing PropertiesWe face significant competition from university-owned collegiate housing and from other private collegiate housing communities located within closeproximity to universities.Many students prefer on-campus housing to off-campus housing because of the closer physical proximity to campus and the integration of on-campus facilities into the academic community. Universities can generally avoid real estate taxes and borrow funds at lower interest rates, while we and otherprivate-sector operators pay full real estate tax rates and incur higher borrowing costs. Consequently, universities often can offer more convenient and/or lessexpensive collegiate housing than we can, which can adversely affect our occupancy and rental rates.We also compete with other national and regional owner-operators of off-campus collegiate housing in a number of markets as well as with smallerlocal owner-operators. There are a number of purpose-built collegiate housing properties that compete directly with us located near or in the same generalvicinity of many of our collegiate housing communities. Such competing collegiate housing communities may be newer than our collegiate housingcommunities, be located closer to campus, charge less rent, possess more attractive amenities, or offer more services, shorter lease terms or more flexibleleases. The construction of competing properties or decreases in rents in competing properties could adversely affect our rental income.We believe that a number of large national companies may be potential entrants in the collegiate housing business. In some cases, these potentialcompetitors possess substantially greater financial and marketing resources than we do. The entry of one or more of these companies into the collegiatehousing market could increase competition for residents and for the acquisition, development and management of other collegiate housing communities.Our results of operations are subject to the following risks inherent in the collegiate housing industry: leasing cycles, concentrated lease-up period,seasonal cash flows and increased risk of student defaults during the summer months.We generally lease our properties under 12 month leases, but we may also lease for terms of nine months or less. As a result, all of our properties mustbe entirely re-leased each year, exposing us to increased leasing risk. We may not be able to re-lease our properties on similar terms, if we are able to re-leaseour properties at all. The terms of renewal or re-lease (including the cost of required renovations) may be less favorable to us than the prior lease. If we areunable to re-lease all or a substantial portion of our properties, or if the rental rates upon such re-leasing are significantly lower than expected rates, our cashflows from operations and our ability to make distributions to stockholders and service indebtedness could be adversely affected.In addition, we are subject to increased leasing risk on properties that we acquire that we have not previously managed due to our lack of experienceleasing those properties and unfamiliarity with their leasing cycles. Collegiate housing communities are typically leased during a leasing season that beginsin October and ends in August of the following year. We are therefore29Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.highly dependent on the effectiveness of our marketing and leasing efforts and personnel during this season. Prior to the commencement of each new leaseperiod, mostly during the first two weeks of August but also during September at some communities and during the summer months for the on-campusproperties leased by semester, we prepare the units for new incoming residents. Other than revenue generated by in-place leases for returning residents, we donot generally recognize lease revenue during this period referred to as “Turn” as we have no leases in place. In addition, during Turn, we incur significantexpenses preparing our units for occupancy, which we recognize immediately. This lease Turn period results in seasonality in our operating results during thesecond and third quarter of each year. As a result, we may experience significantly reduced cash flows during the summer months at properties leased forterms shorter than 12 months.In addition, students may be more likely to default on their rental payments during the summer months. Although we typically require a parent toguarantee the student’s lease, we may have to spend considerable effort and expense in pursuing payment upon a defaulted lease, and our efforts may not besuccessful.We rely on our relationships with universities, and changes in university personnel, policies and/or reputation could adversely affect our operating results.In some cases, we rely on our relationships with universities for referrals of prospective residents or for mailing lists of prospective residents and theirparents. The failure to maintain good relationships with personnel at these universities could therefore have a material adverse effect on us. If universitiesrefuse to make their lists of prospective student-residents and their parents available to us or increase the costs of these lists, the increased costs or failure toobtain such lists could also have a material adverse effect on us.In addition, we may be adversely affected by a change in university admission policies. For example, if a university reduces the number of studentadmissions, the demand for our properties may be reduced, and our occupancy rates may decline. In addition, universities may institute a policy that a certainclass of students, such as freshmen, must live in a university-owned facility, which would also reduce the demand for our properties. While we will engage inmarketing efforts to compensate for such policy changes, we may not be able to effect such marketing efforts prior to the commencement of the annual lease-up period or at all.It is also important that the universities from which our communities draw residents maintain good reputations and are able to attract the desirednumber of incoming students. Any degradation in a university’s reputation could inhibit its ability to attract students and reduce the demand for ourcommunities.Risks Related to our Grocery-Anchored Shopping Center InvestmentsDownturns in the retail industry likely will have a direct adverse impact on our grocery-anchored revenues and cash flow. Our retail properties currently owned and planned for acquisition consist primarily of grocery-anchored shopping centers. Our retail performancetherefore is generally linked to economic conditions in the market for retail space. The market for retail space could be adversely affected by any of thefollowing:•weakness in the national, regional and local economies, and declines in consumer confidence which could adversely impact consumer spendingand retail sales and in turn tenant demand for space and could lead to increased store closings;•changes in market rental rates;•changes in demographics (including the number of households and average household income) surrounding our shopping centers;•adverse financial conditions for grocery anchors and other retail, service, medical or restaurant tenants;•continued consolidation in the retail and grocery sector;•excess amount of retail space in our markets;•reduction in the demand by tenants to occupy our shopping centers as a result of reduced consumer demand for certain retail formats;•increased diversification of product offerings by grocery anchors can lead to increased competition, declining same store sales and storeclosings;•increase in e-commerce and alternative distribution channels may negatively affect out tenant sales or decrease the square footage our tenantsrequire and could lead to margin pressure on our grocery anchors, which could lead to store closures;30Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.•the impact of an increase in energy costs on consumers and its consequential effect on the number of shopping visits to our centers; and•consequences of any armed conflict involving, or terrorist attack against, the United States. To the extent that any of these conditions occur, they are likely to impact market rents for retail space, occupancy in our retail properties, our abilityto sell, acquire or develop retail properties, and our cash available for distributions to stockholders.Competition may impede our ability to renew leases or re-let spaces as leases expire, which could harm our business and operating results.We face competition from similar centers and other types of shopping venues within our market areas that may affect our ability to renew leases orre-let space as leases expire at our grocery-anchored shopping centers. Certain national retail chain bankruptcies and resulting store closings/leasedisaffirmations have generally resulted in increased available retail space which, in turn, has resulted in increased competitive pressure to renew tenant leasesupon expiration and to find new retail tenants for vacant space at such properties. In addition, any new competitive retail properties that are developed withinthe market areas of our existing grocery-anchored shopping centers may result in increased competition for customer traffic and creditworthy retail tenants.Increased competition for retail tenants may require us to make tenant and/or capital improvements to retail properties beyond those that we would otherwisehave planned to make. Any unbudgeted tenant and/or capital improvements we undertake may reduce cash that would otherwise be available fordistributions to our stockholders. Ultimately, if we are unable to renew leases or re-let space as retail leases expire or renew or re-let such spaces at lower rentalrates, our business and operations could be negatively impacted.Loss of revenues from significant tenants and our in-line tenants could reduce distributions to our stockholders.For our currently owned and planned acquisitions of grocery-anchored shopping centers, we derive or will derive significant revenues from anchortenants such as Publix, Kroger, Wal-Mart, Safeway, Sprouts, BJ's Wholesale Club and The Fresh Market, in addition to our in-line tenants.Distributions to our stockholders could be adversely affected by the loss of revenues in the event our tenants:•become bankrupt or insolvent;•experience a downturn in their business;•materially default on their leases;•do not renew their leases as they expire; or•renew at lower rental rates.Vacated anchor space, including space owned by the anchor, can also reduce rental revenues generated by the shopping center because of the loss ofthe departed anchor tenant's customer drawing power. The closing of one or more anchor stores at a center or occupancy falling below a certain percentagecould adversely affect the financial performance of the center, adversely affect the operations of other tenants and result in lease terminations by, orreductions in rent from, other tenants whose leases may permit such actions.We may be unable to collect balances due from retail tenants in bankruptcy.Although minimum rent is supported by lease contracts of varying term, retail tenants who file bankruptcy have the legal right to reject any or all oftheir leases and close related stores. In the event that a retail tenant with a significant number of leases in our shopping centers files bankruptcy and rejects itsleases, we could experience a significant reduction in our retail revenues and may not be able to collect all pre-petition amounts owed by that party.Our Common Area Maintenance (“CAM”) contributions may not allow us to recover the majority of our operating expenses from retail tenants.CAM costs typically include allocable energy costs, repairs, maintenance and capital improvements to common areas, janitorial services,administrative, property and liability insurance costs and security costs. The amount of CAM charges we bill to our retail tenants may not allow us to recoveror pass on all these operating expenses to tenants, which may reduce operating cash flow from our retail properties.31Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Operating expenses may remain constant or increase even if occupancy and income at our centers may decrease, negatively affecting our financialperformance.Costs associated with our operations, such as real estate and personal property taxes, insurance, and mortgage payments, generally are not reducedeven as occupancy or rental rates decrease, tenants fail to pay base and additional rent or other circumstances cause a reduction in income from the center. Asa result, our financial performance, cash flow from operations from the center and our ability to make distributions to our stockholders may be adverselyaffected. In addition, inflation could result in increased operating costs for us and our tenants, which may adversely affect our financial performance andability to make distributions to our stockholders.Increased competition to traditional grocery chains from new market participants, Amazon, online supermarket retailers and food delivery services couldadversely affect our grocery-anchored revenues and cash flow.As a result of consumers' growing desire to shop online, traditional grocery chains are subject to increasing competition from new marketparticipants and food retailers who have incorporated the Internet as a direct-to-consumer channel and Internet-only retailers that sell grocery products.Additionally, online food delivery services are increasingly competing with traditional grocery chains in the food sales market. Competition from these newmarket participants and selling channels could negatively impact traditional grocery chains, which could adversely affect our grocery-anchored revenues andcash flow. In addition, changing dynamics in the food sales space could result in increased competition, declining same-store sales and store closings in theretail and grocery sector.Risks Related to our Office Building InvestmentsOur performance is subject to risks associated with our office properties and the office property industry.Our economic performance from our office properties is subject to the risk that if our office properties do not generate revenues sufficient to meet ouroperating expenses, including debt service and capital expenditures, our cash flow and ability to pay distributions to our stockholders will be adverselyaffected. The following factors, among others, may adversely affect the income generated by our properties:• downturns in the national, regional and local economic conditions (particularly increases in unemployment);• competition from other office properties;• local real estate market conditions, such as oversupply or reduction in demand for office space;• vacancies, changes in market rental rates and the need to periodically repair, renovate and re-let office space;• changes in space utilization by our office tenants due to technology, economic conditions and business culture;• increased operating costs, including insurance expense, utilities, real estate taxes, state and local taxes and heightenedsecurity costs; and• declines in the financial condition of our office tenants and our ability to collect rents from our office tenants.We face considerable competition in the office leasing market and may be unable to renew existing office leases or re-let office space on terms similar tothe existing leases, or we may expend significant capital in our efforts to re-let office space, which may adversely affect our operating results.Every year, we compete with a number of other developers, owners, and operators of office and office-oriented properties to renew office leases withour existing tenants and to attract new office tenants. To the extent that we are able to renew office leases that are scheduled to expire in the short-term or re-let such office space to new tenants, heightened competition resulting from adverse market conditions may require us to utilize rent concessions and tenantimprovements to a greater extent than we historically have. In addition, competition for credit worthy office tenants is intense and we may have difficultycompeting with competitors, especially those who have purchased office properties at discounted prices allowing them to offer office space at reduced rentalrates.If our competitors offer office accommodations at rental rates below current market rates or below the rental rates we currently charge our tenants, wemay lose potential tenants, and we may be pressured to reduce our rental rates below those we currently charge in order to retain tenants upon expiration oftheir existing office leases. Even if our tenants renew their leases or we are able to re-let the office space, the terms and other costs of renewal or re-letting,including the cost of required renovations, increased tenant improvement allowances, leasing commissions, declining rental rates, and other potentialconcessions, may be less favorable than the terms of our current leases and could require significant capital expenditures. If we are unable to renew officeleases or re-let office space in a reasonable time, or if rental rates decline or tenant improvement, leasing commissions, or32Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.other costs increase, our financial condition, cash flows, ability to pay distributions to our stockholders, and ability to satisfy our debt service obligationscould be adversely affected.We face potential adverse effects from major office tenants’ bankruptcies or insolvencies.The bankruptcy or insolvency of a major office tenant may adversely affect the income produced by our office properties. Our office tenants couldfile for bankruptcy protection or become insolvent in the future. We cannot evict an office tenant solely because of its bankruptcy. On the other hand, abankrupt office tenant may reject and terminate its lease with us. In such case, our claim against the bankrupt office tenant for unpaid and future rent wouldbe subject to a statutory cap that might be substantially less than the remaining rent actually owed under the office lease, and, even so, our claim for unpaidrent would likely not be paid in full. This shortfall could adversely affect our cash flow and results of operations.In order to maintain and/or increase the quality of our office properties and successfully compete against other office properties, we regularly must spendmoney to maintain, repair, renovate and improve our office properties, which could negatively impact our financial condition and results of operations.If our office properties are not as attractive to customers due to physical condition as office properties owned by our competitors, we could losecustomers or suffer lower rental rates. As a result, we may from time to time be required to make significant capital expenditures to maintain or enhance thecompetitiveness of our office properties. There can be no assurances that any such expenditures would result in higher occupancy or higher rental rates ordeter existing customers from relocating to office properties owned by our competitors.Material U.S. Federal Income Tax ConsiderationsIf we fail to maintain our qualification as a REIT, we will be subjected to tax on our income and the amount of distributions we make to our stockholderswill be less.We elected to be taxed as a REIT, commencing with our tax year ended December 31, 2011. A REIT generally is not taxed at the corporate level onincome and gains it distributes to its stockholders on a timely basis.If we were to fail to qualify as a REIT in any taxable year:•we would not be allowed to deduct our distributions to our stockholders when computing our taxable income;•we would be subject to U.S. federal income tax on our taxable income at the corporate rate and possibly increased state and local taxes;•we could be disqualified from being taxed as a REIT for the four taxable years following the year during which qualification was lost, unless entitledto relief under certain statutory provisions;•we would have less cash to make distributions to our stockholders; and•we might be required to borrow additional funds or sell some of our assets in order to pay corporate tax obligations we may incur as a result of ourdisqualification.Although we intend to operate in a manner intended to qualify as a REIT, it is possible that we may inadvertently terminate our REIT election orthat future economic, market, legal, tax or other considerations may cause our board of directors to determine to revoke our REIT election. Even if we qualifyas a REIT, we expect to incur some taxes, such as state and local taxes, taxes imposed on certain subsidiaries and potential U.S. federal excise taxes.We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operatingflexibility and reduce the market price of our Common Stock.In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax lawsapplicable to REITs. Additional changes to the tax laws are likely to continue to occur. Although REITs generally receive better tax treatment than entitiestaxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become moreadvantageous for a company that invests in real estate to elect to be treated for U.S. federal income tax purposes as a regular corporation. As a result, ourcharter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate the REIT election we have made andcause us to be taxed as a regular corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our stockholders andcould only effect such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.33Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Certain of our business activities are potentially subject to the prohibited transaction tax. For so long as we continue to qualify as a REIT, our ability to dispose of property during the first few years following acquisition may be restrictedto a substantial extent as a result of our REIT qualification. Under applicable provisions of the Code regarding prohibited transactions by REITs, while wequalify as a REIT and provided we do not satisfy a safe harbor available under the Code, we will be subject to a 100% penalty tax on the net income from thesale or other disposition of any property (other than foreclosure property) that we own, directly or indirectly through any subsidiary entity, including ouroperating partnership, but generally excluding taxable REIT subsidiaries, that is deemed to be inventory or property held primarily for sale to customers inthe ordinary course of a trade or business. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade orbusiness depends on the particular facts and circumstances surrounding each property. We intend to avoid the 100% prohibited transaction tax by (1)conducting activities that may otherwise be considered prohibited transactions through a taxable REIT subsidiary (but such taxable REIT subsidiary willincur corporate rate income taxes with respect to any income or gain recognized by it), (2) conducting our operations in such a manner so that no sale or otherdisposition of an asset we own, directly or through any subsidiary, will be treated as a prohibited transaction or (3) structuring certain dispositions of ourproperties to comply with the requirements of the prohibited transaction safe harbor available under the Code for properties that, among other requirements,have been held for at least two years. Despite our present intention, no assurance can be given that any particular property we own, directly or through anysubsidiary entity, including our operating partnership, but generally excluding taxable REIT subsidiaries, will not be treated as inventory or property heldprimarily for sale to customers in the ordinary course of a trade or business.If the Operating Partnership fails to maintain its status as a partnership for U.S. federal income tax purposes, its income may be subject to taxation and wewould cease to qualify as a REIT.We intend to maintain the status of the Operating Partnership as a partnership for U.S. federal income tax purposes. However, if the IRS were tosuccessfully challenge the status of the Operating Partnership as a partnership for such purposes, it would be taxable as a corporation. In such event, thiswould reduce the amount of distributions that the Operating Partnership could make to us. This also would result in our losing REIT status, and becomingsubject to a corporate level tax on our own income, and would substantially reduce our cash available to pay distributions and the yield to our stockholders.In addition, if any of the partnerships or limited liability companies through which the Operating Partnership owns its properties, in whole or in part, loses itscharacterization as a partnership and is not otherwise disregarded for U.S. federal income tax purposes, it would be subject to taxation as a corporation,thereby reducing distributions to the Operating Partnership. Such a recharacterization of an underlying property owner could also threaten our ability tomaintain our REIT qualification.Our investments in certain debt instruments may cause us to recognize income for U.S. federal income tax purposes even though no cash payments havebeen received on the debt instruments, and certain modifications of such debt by us could cause the modified debt to not qualify as a good REIT asset,thereby jeopardizing our REIT qualification.Our taxable income may substantially exceed our net income as determined based on GAAP, or differences in timing between the recognition oftaxable income and the actual receipt of cash may occur. For example, we may acquire assets, including debt securities requiring us to accrue original issuediscount, or OID, or recognize market discount income, that generate taxable income in excess of economic income or in advance of the corresponding cashflow from the assets. In addition, if a borrower with respect to a particular debt instrument encounters financial difficulty rendering it unable to pay statedinterest as due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income. We may also be required under the terms ofthe indebtedness that we incur to use cash received from interest payments to make principal payment on that indebtedness, with the effect that we willrecognize income but will not have a corresponding amount of cash available for distribution to our stockholders.As a result of the foregoing, we may generate less cash flow than taxable income in a particular year and find it difficult or impossible to meet theREIT distribution requirements in certain circumstances. In such circumstances, we may be required to (1) sell assets in adverse market conditions, (2) borrowon unfavorable terms, (3) distribute amounts that would otherwise be used for future acquisitions or used to repay debt, or (4) make a taxable distribution ofour shares of Common Stock as part of a distribution in which stockholders may elect to receive shares of Common Stock or (subject to a limit measured as apercentage of the total distribution) cash, in order to comply with the REIT distribution requirements.34Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.The failure of a subordinate loan to qualify as a real estate asset could adversely affect our ability to maintain our qualification as a REIT.In general, in order for a loan to be treated as a qualifying real estate asset producing qualifying income for purposes of the REIT asset and incometests, the loan must be secured by real property. We may originate (in connection with a forward purchase or option to purchase contract) or acquiresubordinate loans that are not directly secured by real property but instead secured by equity interests in a partnership or limited liability company thatdirectly or indirectly owns real property. In Revenue Procedure 2003-65, the IRS provided a safe harbor pursuant to which a subordinate loan that is notsecured by real estate would, if it meets each of the requirements contained in the Revenue Procedure, be treated by the IRS as a qualifying real estate asset.Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law and in many cases itmay not be possible for us to meet all the requirements of the safe harbor. We cannot provide assurance that any subordinate loan in which we invest wouldbe treated as a qualifying asset producing qualifying income for REIT qualification purposes. If any such loan fails either the REIT income or asset tests, wemay be disqualified as a REIT.Furthermore, if we participate in any appreciation in value of real property securing a mortgage loan and the IRS characterizes such “sharedappreciation mortgage” as equity rather than debt, for example, because of a large interest in cash flow of the borrower, we may be required to recognizeincome, gains and other items with respect to the real property for U.S. federal income tax purposes. This could affect our ability to maintain our qualificationas a REIT.The share ownership restrictions of the Code for REITs and the 9.8% share ownership limit in our charter may inhibit market activity in our shares ofstock and restrict our business combination opportunities.In order to maintain our qualification as a REIT, five or fewer individuals, as defined in the Code, may not own, actually or constructively, more than50% in value of our issued and outstanding shares of stock at any time during the last half of each taxable year, other than the first year for which a REITelection is made. Attribution rules in the Code determine if any individual or entity actually or constructively owns our shares of stock under thisrequirement. Additionally, at least 100 persons must beneficially own our shares of stock during at least 335 days of a taxable year for each taxable year,other than the first year for which a REIT election is made. To help insure that we meet these tests, among other purposes, our charter restricts the acquisitionand ownership of our shares of stock.Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as aREIT while we so qualify. Unless exempted by our board of directors, for so long as we qualify as a REIT, our charter prohibits, among other limitations onownership and transfer of shares of our stock, any person from beneficially or constructively owning (applying certain attribution rules under the Code) morethan 9.8% in value of the aggregate of our outstanding shares of stock or more than 9.8% (in value or number of shares, whichever is more restrictive) of anyclass or series of our shares of stock. Our board of directors may not grant an exemption from these restrictions to any proposed transferee whose ownership inexcess of 9.8% of the value of our outstanding shares would result in the termination of our qualification as a REIT. These restrictions on transferability andownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT or thatcompliance with the restrictions is no longer required in order for us to continue to so qualify as a REIT.These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our stock or otherwise bein the best interest of our stockholders.Certain Employee Benefit Plan Risks If you fail to meet the fiduciary and other standards under ERISA or the Code as a result of an investment in our stock, you could be subject to liability andpenalties. Special considerations apply to the purchase or holding of securities by employee benefit plans subject to the fiduciary rules of Title I of ERISA(“ERISA Plans”), including pension or profit sharing plans and entities that hold assets of such ERISA Plans, and plans and accounts that are not subject toERISA, but are subject to the prohibited transaction rules of Section 4975 of the Code, including IRAs, Keogh Plans, and medical savings accounts(collectively, we refer to ERISA Plans and plans subject to Section 4975 of the Code as “Benefit Plans”). If you are investing the assets of any Benefit Plan,you should satisfy yourself that: 35Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.•your investment is consistent with your fiduciary obligations under ERISA and the Code;•your investment is made in accordance with the documents and instruments governing the Benefit Plan, including the Benefit Plan’s investmentpolicy;•your investment satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA, if applicable, and otherapplicable provisions of ERISA and the Code;•in making such investment decision, you have considered the effect the investment will have on the liquidity of the Benefit Plan and whether or notthe investment will produce UBTI for the Benefit Plan;•you will be able to value the assets of the Benefit Plan annually in accordance with any applicable ERISA or Code requirements and applicableprovisions of the Benefit Plan; and•your investment will not constitute a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code. Fiduciaries may be held personally liable under ERISA for losses as a result of failure to satisfy the fiduciary standards of conduct and otherapplicable requirements of ERISA. In addition, if an investment in, or holding of, our securities constitutes a non-exempt prohibited transaction under ERISAor the Code, the fiduciary of the plan who authorized or directed the investment may be subject to imposition of excise taxes with respect to the amountinvested and an IRA investing in the stock may lose its tax exempt status.Plans that are not subject to ERISA or the prohibited transactions of the Code, such as government plans or church plans, may be subject to similarrequirements under state law. Such plans should satisfy themselves that the investment satisfies applicable law. We have not, and will not, evaluate whetheran investment in, or holding of, our securities is suitable for any particular plan.Item 1B.Unresolved Staff CommentsNone.36Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Item 2.PropertiesMultifamily CommunitiesAt December 31, 2018, we were the owner of the following 32 properties within our multifamily communities segment:Property Location Year constructed Numberof Units AverageUnit Size(sq. ft.) AverageRent perUnit (1) Summit Crossing Atlanta, GA 2007 345 1,034 1,162Summit Crossing II Atlanta, GA 2013 140 1,100 1,271The Reserve at Summit Crossing Atlanta, GA 2017 172 1,002 1,353Vineyards Houston, TX 2003 369 1,122 1,177Aster at Lely Resort Naples, FL 2015 308 1,071 1,486CityPark View Property: CityPark View Charlotte, NC 2014 284 948 1,113CityPark View South Charlotte, NC 2017 200 1,005 —Avenues at Cypress Houston, TX 2014 240 1,170 1,450Venue at Lakewood Ranch Sarasota, FL 2015 237 1,001 1,570Avenues at Creekside San Antonio, TX 2014 395 974 1,156Citi Lakes Orlando, FL 2014 346 984 1,425Avenues at Northpointe Houston, TX 2013 280 1,167 1,380Lenox Village Property: Lenox Village Nashville, TN 2009 273 906 1,248Regent at Lenox Village Nashville, TN 2009 18 1,072 1,264Retreat at Lenox Village Nashville, TN 2015 183 773 1,181Stone Creek Houston, TX 2009 246 852 1,098Overton Rise Atlanta, GA 2015 294 1,018 1,553Village at Baldwin Park Orlando, FL 2008 528 1,069 1,677Crosstown Walk Property: Crosstown Walk Tampa, FL 2014 342 981 1,306Overlook at Crosstown Walk Tampa, FL 2016 180 986 1,391525 Avalon Park Orlando, FL 2008 487 1,394 1,460Sorrel Jacksonville, FL 2015 290 1,048 1,284Retreat at Greystone Birmingham, AL 2015 312 1,100 1,248Broadstone At Citrus Village Tampa, FL 2011 296 980 1,293Founders Village Williamsburg, VA 2014 247 1,070 1,388Claiborne Crossing Louisville, KY 2014 242 1,204 1,349Luxe at Lakewood Ranch Sarasota, FL 2016 280 1,105 1,498Adara Overland Park Kansas City, KS 2016 260 1,116 1,346Aldridge at Town Village Atlanta, GA 2016 300 969 1,347Colony at Centerpointe Richmond, VA 2016 255 1,149 1,382City Vista (2) Pittsburgh, PA 2014 272 1,023 1,368Lux at Sorrel Jacksonville, FL 2017 265 1,025 1,392Green Park Atlanta, GA 2017 310 985 1,467Lodge at Hidden River Tampa, FL 2017 300 980 —Vestavia Reserve Birmingham, AL 2016 272 1,113 — 9,768 (1) Data is only presented for stabilized properties owned by us for at least three months. (2) We own approximately 96% of the joint venture that controls the City Vista multifamily community. Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.37Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Student Housing CommunitiesAt December 31, 2018, we were the owner of the following seven properties within our student housing communities segment:Property Location University Yearconstructed/renovated Numberof Units Numberof beds AverageUnit Size(sq. ft.) AverageRent perBed (1) North byNorthwest Tallahassee, FL Florida State University 2012 219 679 1,250 $729SoL Tempe, AZ Arizona State University 2010 224 639 1,296 $694StadiumVillage (2) Atlanta, GA Kennesaw State University 2015 198 792 1,466 $718Ursa (2) Waco, TX Baylor University 2017 250 840 1,634 n/aTheTradition College Station, TX Texas A&M University 2017 427 808 549 n/aThe Retreatat Orlando Orlando, FL University of Central Florida 2014 221 894 2,036 n/aThe Bloc Lubbock, TX Texas Tech University 2017 140 556 1,394 n/a 1,679 5,208 (1) Data only presented for stabilized student housing communities. (2) We own approximately 99% of the joint venture that controls the Stadium Village and Ursa student housing properties. Our communities are equipped with an array of amenities believed to be sufficient to position Preferred Apartment Communities as attractiveresidential rental options within each local market. Such amenities can include, but are not limited to, one or more swimming pools, a clubhouse with abusiness center, tennis courts and laundry facilities. Unit-specific amenities can include high-end appliances, tile kitchen backsplashes, washer and dryers orwasher and dryer hookups and ceiling fans. Resident lease terms are generally twelve months in duration.38Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.New Market PropertiesAt December 31, 2018, we were the sole owner of the following 45 grocery-anchored shopping centers, which comprise our New Market Propertiessegment:Property name Location Year built GLA (1) Percentleased (2) Grocery anchortenant Castleberry-Southard Atlanta, GA 2006 80,018 100.0% PublixCherokee Plaza Atlanta, GA 1958 102,864 100.0% KrogerGovernors Towne Square Atlanta, GA 2004 68,658 95.9% PublixLakeland Plaza Atlanta, GA 1990 301,711 95.1% SproutsPowder Springs Atlanta, GA 1999 77,853 96.9% PublixRockbridge Village Atlanta, GA 2005 102,432 94.2% KrogerRoswell Wieuca Shopping Center Atlanta, GA 2007 74,370 96.6% The Fresh MarketRoyal Lakes Marketplace Atlanta, GA 2008 119,493 88.4% KrogerSandy Plains Exchange Atlanta, GA 1997 72,784 93.2% PublixSummit Point Atlanta, GA 2004 111,970 86.9% PublixThompson Bridge Commons Atlanta, GA 2001 92,587 96.1% KrogerWade Green Village Atlanta, GA 1993 74,978 93.2% PublixWoodmont Village Atlanta, GA 2002 85,639 94.6% KrogerWoodstock Crossing Atlanta, GA 1994 66,122 100.0% KrogerEast Gate Shopping Center Augusta, GA 1995 75,716 92.2% PublixFury's Ferry Augusta, GA 1996 70,458 98.0% PublixParkway Centre Columbus, GA 1999 53,088 100.0% PublixSpring Hill Plaza Nashville, TN 2005 61,570 100.0% PublixParkway Town Centre Nashville, TN 2005 65,587 100.0% PublixThe Market at Salem Cove Nashville, TN 2010 62,356 100.0% PublixThe Market at Victory Village Nashville, TN 2007 71,300 98.5% PublixGreensboro Village Nashville, TN 2005 70,203 98.3% PublixThe Overlook at Hamilton Place Chattanooga, TN 1992 213,095 100.0% The Fresh MarketShoppes of Parkland Miami-Ft. Lauderdale,FL 2000 145,720 98.4% BJ's Wholesale ClubBarclay Crossing Tampa, FL 1998 54,958 100.0% PublixDeltona Landings Orlando, FL 1999 59,966 100.0% PublixUniversity Palms Orlando, FL 1993 99,172 100.0% PublixConway Plaza Orlando, FL 1966 117,705 98.0% PublixCrossroads Market Naples, FL 1993 126,895 98.9% PublixNeapolitan Way Naples, FL 1985 137,580 91.6% PublixChampions Village Houston, TX 1973 383,346 78.7% RandallsKingwood Glen Houston, TX 1998 103,397 97.9% KrogerIndependence Square Dallas, TX 1977 140,218 83.0% Tom ThumbOak Park Village San Antonio, TX 1970 64,855 100.0% H.E.B.Sweetgrass Corner Charleston, SC 1999 89,124 96.2% Bi-LoIrmo Station Columbia, SC 1980 99,384 95.3% KrogerAnderson Central GreenvilleSpartanburg, SC 1999 223,211 96.1% WalmartFairview Market GreenvilleSpartanburg, SC 1998 53,888 73.5% AldiRosewood Shopping Center Columbia, SC 2002 36,887 90.2% PublixBrawley Commons Charlotte, NC 1997 122,028 97.4% PublixWest Town Market Charlotte, NC 2004 67,883 100.0% Harris TeeterHeritage Station Raleigh, NC 2004 72,946 100.0% Harris TeeterMaynard Crossing Raleigh, NC 1996 122,781 97.4% Harris TeeterSouthgate Village Birmingham, AL 1988 75,092 98.0% PublixHollymead Town Center Charlottesville, VA 2005 158,807 89.8% Harris Teeter Grand total/weighted average 4,730,695 94.3% (1) Gross leasable area, or GLA, represents the total amount of property square footage that can be leased to tenants. The total excludes approximately 47,600square feet of ground floor retail GLA in the Regent at Lenox Village property.(2) Percent leased represents the percentage of GLA that is leased, including noncancelable lease agreements that have been signed but which have not yetSource: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.commenced.39Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Our retail leases have original lease terms which generally range from three to seven years for spaces under 5,000 square feet and from 10 to 20 yearsfor spaces over 10,000 square feet. Anchor leases generally contain renewal options for one or more additional periods whereas in-line tenant leases may ormay not have renewal options. With the exception of anchor leases, the leases generally contain contractual increases in base rent rates over the lease termand the base rent rates for renewal periods are generally based upon the rental rate for the primary term, which may be adjusted for inflation or marketconditions. Anchor leases generally do not contain contractual increases in base rent rates over the lease term and the renewal periods. Our leases generallyprovide for the payment of fixed monthly rentals and may also provide for the payment of additional rent based upon a percentage of the tenant’s gross salesabove a certain threshold level (“percentage rent”). Our leases also generally include tenant reimbursements for common area expenses, insurance, and realestate taxes. Utilities are generally paid by tenants either directly through separate meters or through payment of tenant reimbursements. The foregoinggeneral description of the characteristics of the leases in our centers is not intended to describe all leases and material variations in lease terms may exist.Our grocery anchor tenants comprised 50.5% of our portfolio GLA at December 31, 2018. Our small in-line tenants generally consist of retail,consumer services, healthcare providers, and restaurants; none of our small in-line tenants individually constitute more than 1.0% of our portfolio GLA as ofDecember 31, 2018. The following table summarizes our grocery anchor tenants by GLA as of December 31, 2018:Grocery Anchor Tenant GLA % of GLAwithin retailportfolioPublix 1,039,959 22.0%Kroger 518,194 11.0%Harris Teeter 222,523 4.7%Wal-Mart 183,211 3.9%BJ's Wholesale Club 108,532 2.3%Randall's 61,604 1.3%Bi-Lo 59,824 1.3%H.E.B 54,844 1.2%Tom Thumb 43,600 0.9%The Fresh Market 43,321 0.9%Sprouts 29,855 0.6%Aldi 23,622 0.5% Total 2,389,089 The following table summarizes New Market Properties' contractual lease expirations for the next ten years and thereafter, assuming no tenantsexercise their renewal options: New Market Properties Segment Number ofleases Leased GLA Percent ofleased GLA Month to month7 14,638 0.3%201994 424,978 9.5%2020131 554,319 12.4%2021135 623,682 14.0%2022109 354,688 8.0%2023104 397,395 8.9%202443 772,547 17.3%202528 491,917 11.0%202612 145,520 3.3%202719 121,651 2.7%202819 245,115 5.5%2029+16 311,516 7.1% Total717 4,457,966 100.0%40Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Office PropertiesAt December 31, 2018, we were the sole owner of the following seven office properties, which comprise our Preferred Office Properties segment:Property Name Location GLA Percent leasedThree Ravinia Atlanta, GA 814,000 91%150 Fayetteville Raleigh, NC 560,000 89%Capitol Towers Charlotte, NC 479,000 95%Westridge at La Cantera San Antonio, TX 258,000 100%Armour Yards Atlanta, GA 187,000 95%Brookwood Center Birmingham, AL 169,000 100%Galleria 75 Atlanta, GA 111,000 94% 2,578,000 93%Our office building leases have original lease terms which generally range from 5 to 15 years and generally contain contractual, annual base rentalrate escalations ranging from 2% to 3%. These leases may be structured as “gross” where the tenant’s base rental rate is all inclusive and there is no additionalobligation to reimburse building operating expenses, “net” or “NNN” where in addition to base rent the tenant is also responsible for its pro rata share ofreimbursable building operating expenses, or “modified gross” where in addition to base rent the tenant is also responsible for its pro rata share ofreimbursable building operating expense increases over a base year amount (typically calculated as the actual reimbursable operating expenses in year one ofthe original lease term).As of December 31, 2018, our significant tenants within our Preferred Office Properties segment consisted of: Rentable squarefootage Percent of AnnualBase Rent Annual Base Rent(in thousands)InterContinental Hotels Group520,000 18.9% $11,822Albemarle162,000 9.1% 5,706State Farm Mutual Automobile Insurance Company183,000 5.3% 3,311United Services Automobile Association129,000 4.9% 3,042Harland Clarke Corporation129,000 4.6% 2,881 1,123,000 42.8% $26,762The following table summarizes contractual lease expirations within our Preferred Office Properties segment for the next ten years and thereafter,assuming no tenants exercise their renewal options:Preferred Office Properties segment Percent ofYear of leaseexpiration Rented square rented feet square feet2019 83,000 3.5%2020 62,000 2.6%2021 245,000 10.3%2022 65,000 2.7%2023 107,000 4.5%2024 204,000 8.6%2025 137,000 5.8%2026 165,000 7.0%2027 267,000 11.2%2028 213,000 9.0%2029+ 827,000 34.8% Total 2,375,000 100.0%Details regarding the mortgage debt on our properties may be found in the consolidated financial statements within this Annual Report on Form 10-K.41Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Our corporate headquarters is located at 3284 Northside Parkway NW, Suite 150, Atlanta, Georgia 30327.Item 3.Legal ProceedingsNeither we nor our subsidiaries nor, to our knowledge, our Manager is currently subject to any legal proceedings that we or our Manager consider tobe material. To our knowledge, none of our communities are currently subject to any legal proceeding that we consider material.Item 4. Mine Safety DisclosuresNot applicable.Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket InformationOur Common Stock (symbol "APTS") has been listed on the New York Stock Exchange since July 17, 2015.As of December 31, 2018, there were approximately 26,000 holders of record of our Common Stock. This total excludes an unknown number ofholders of 7.2 million shares of Common Stock in street name at non-responding brokerage firms.DividendsWe have declared and subsequently paid cash dividends on shares of our Common Stock for each quarter since our IPO in 2011. Since we haveelected to be taxed as a REIT effective with our tax year ended December 31, 2011, we are required to, and intend to, distribute at least 90% of our REITtaxable income (which does not equal net income as calculated in accordance with GAAP and determined without regard for the deduction for dividends paidand excluding net capital gains) to maintain such status. Dividends are declared with the action and approval of our board of directors and any futuredistributions are made at our board of director's discretion. Our dividend paying capacity is primarily dependent upon cash generated from our multifamilycommunities, grocery-anchored shopping centers and office properties, interest income on our real estate loans and cash needs for capital expenditures, bothforeseen and unforeseen, among other factors. Risks inherent in our ability to pay dividends are further described in the section entitled “Risk Factors” inItem 1A of this Annual Report on Form 10-K.42Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Stockholder Return Performance GraphThe following stock performance graph and related information shall not be deemed “soliciting material” or “filed” with the Securities andExchange Commission, nor shall such information be incorporated by reference into any future filings under the Exchange Act, except to the extent that wespecifically incorporate it by reference into such filing.The chart above presents comparative investment results of a hypothetical initial investment of $1,000 on January 1, 2014 in: (i) our CommonStock, ticker symbol "APTS;" (ii) the MSCI U. S. REIT Index, an index of equity REIT constituent companies that derive the majority of their revenue fromreal estate rental activities; and (iii) the S&P 500 Index. The total return results assume automatic reinvestment of dividends and no transaction costs. Value of initial investment on: 1/1/2014 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018APTS Common Stock $1,000 $1,223 $1,782 $2,155 $3,099 $2,290MSCI U. S. REIT Index $1,000 $1,304 $1,337 $1,452 $1,525 $1,456S&P 500 $1,000 $1,114 $1,106 $1,211 $1,446 $1,356Sales of Unregistered SecuritiesThere were no previously unreported sales of unregistered securities by the Company during the fiscal year ended 2018.43Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Item 6.Selected Financial DataThe following table sets forth selected financial and operating data on a historical basis and should be read in conjunction with the section entitled“Management's Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes theretoappearing elsewhere in this Annual Report on Form 10-K. Year Ended December 31,(In thousands, except per-share data andpreferred stock par values)2018 2017 2016 2015 2014Total revenues$397,271 $294,005 $200,119 $109,306 $56,536 Net income (loss)$44,538 $28,667 $(9,843) $(2,426) $2,127 Net loss per share of Common Stock available to common stockholders, basic and diluted$(1.08) $(1.13) $(2.11) $(0.95) $(0.31) Weighted average number of shares of Common Stock outstanding, basic and diluted40,032 31,926 23,969 22,183 17,399 Cash dividends declared per share of CommonStock$1.02 $0.94 $0.8175 $0.7275 $0.655 Total assets$4,410,958 $3,252,370 $2,420,833 $1,295,529 $691,383 Long term debt$2,339,752 $1,812,049 $1,327,878 $696,945 $354,419Revolving credit facility$57,000 $41,800 $127,500 $34,500 $24,500 Total liabilities$2,801,573 $1,971,604 $1,535,571 $770,075 $399,801 Preferred Stock (par value outstanding)$16,518 $12,373 $9,144 $4,830 $1,928 Total equity$1,609,385 $1,280,766 $885,261 $525,454 $291,582 Cash flows provided by (used in): Operating activities$145,381 $86,289 $61,661 $35,221 $15,436Investing activities$(881,805) $(727,177) $(1,126,584) $(533,510) $(356,424)Financing activities$751,102 $646,185 $1,074,804 $497,615 $334,921 Funds from operations ("FFO")(1)$57,773 $43,344 $22,386 $16,702 $10,967Adjusted funds from operations ("AFFO")(1)$54,429 $38,377 $26,595 $21,783 $14,771 (1) See "Reconciliation of FFO Attributable to Common Stockholders and Unitholders and AFFO to Net Income (Loss) Attributable toCommon Stockholders" and "Definitions of Non-GAAP Measures" in the Results of Operations section within "Management's Discussionand Analysis of Financial Condition and Results of Operations," in this Annual Report on Form 10-K.Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsSignificant DevelopmentsDuring the year ended December 31, 2018, we acquired five multifamily communities, six grocery-anchored shopping centers, three student housingproperties and three office buildings.During the year ended December 31, 2018, we sold our Lake Cameron, Stone Rise, Stoneridge Farms at the Hunt Club and McNeil Ranchmultifamily communities located in Raleigh, North Carolina, Philadelphia, Pennsylvania, Nashville, Tennessee and Austin, Texas respectively, and collectedaggregate gross proceeds of $171.0 million. We realized an aggregate gain on the sale of these properties of approximately $69.6 million.44Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.During the year ended December 31, 2018, we issued 423,781 units and collected net proceeds of approximately $381.4 million from our $1.5Billion Unit Offering and issued 28,951 shares of Series M Preferred Stock and and collected net proceeds of approximately $28.1 million from our mSharesOffering. Our Preferred Stock offerings and our other equity offerings are discussed in detail in the Liquidity and Capital Resources section of thisManagement's Discussion and Analysis of Financial Condition and Results of Operations.On May 12, 2017, we issued 2,750,000 shares of our common stock, par value $0.01 per share, or Common Stock, at a public offering price of$15.25 per share pursuant to an underwritten public offering. On May 30, 2017, we sold an additional 412,500 shares of Common Stock at $15.25 per sharepursuant to the underwriters' exercise in full of an option granted to the underwriters in connection with the public offering. The combined gross proceeds ofthe two sales was approximately $48.2 million before deducting underwriting discounts and commissions and other estimated offering expenses.In addition, during the year ended December 31, 2018, we issued approximately 1.25 million shares of Common Stock upon the exercise of Warrantsissued in our offerings of our Series A Redeemable Preferred Stock and collected net proceeds of approximately $16.1 million from those exercises.Forward-looking StatementsCertain statements contained in this Annual Report on Form 10-K, including, without limitation, statements containing the words "believes,""anticipates," "intends," "expects," "assumes," "goals," "guidance," "trends" and similar expressions, constitute "forward-looking statements" within themeaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon our current plans, expectations and projectionsabout 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-lookingstatements. Such factors include, among others, the following:• our business and investment strategy;• our projected operating results;•actions and initiatives of the U.S. Government and changes to U.S. Government policies and the execution and impact of these actions, initiativesand policies;• the state of the U.S. economy generally or in specific geographic areas;• economic trends and economic recoveries;•our ability to obtain and maintain financing arrangements, including through Fannie Mae and Freddie Mac;• financing and advance rates for our target assets;• our expected leverage;• changes in the values of our assets;• our expected portfolio of assets;• our expected investments;• interest rate mismatches between our target assets and our borrowings used to fund such investments;• changes in interest rates and the market value of our target assets;• changes in prepayment rates on our target assets;• effects of hedging instruments on our target assets;• rates of default or decreased recovery rates on our target assets;•changes in our operating costs, including real estate taxes, utilities and insurance costs;• the degree to which our hedging strategies may or may not protect us from interest rate volatility;• impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters;• our ability to maintain our qualification as a real estate investment trust, or REIT, for U.S. federal income tax purposes;• our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended;• the availability of investment opportunities in mortgage-related and real estate-related investments and securities;• the availability of qualified personnel;• estimates relating to our ability to make distributions to our stockholders in the future;• our understanding of our competition;• market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy;•weakness in the national, regional and local economies, which could adversely impact consumer spending and retail sales and in turn tenant demandfor space and could lead to increased store closings;•changes in market rental rates;45Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.•changes in demographics (including the number of households and average household income) surrounding our shopping centers;•adverse financial conditions for grocery anchors and other retail, service, medical or restaurant tenants;•continued consolidation in the grocery-anchored shopping center sector;•excess amount of retail space in our markets;•reduction in the demand by tenants to occupy our shopping centers as a result of reduced consumer demand for certain retail formats;•the growth of super-centers and warehouse club retailers, such as those operated by Wal-Mart and Costco, and their adverse effect on traditionalgrocery 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 deliveryservices and online supermarket retailers and their collective adverse effect on traditional grocery chains;•our ability to aggregate a critical mass of grocery-anchored shopping centers;•the impact of an increase in energy costs on consumers and its consequential effect on the number of shopping visits to our centers; and•consequences of any armed conflict involving, or terrorist attack against, the United States.Forward-looking statements are found throughout this "Management’s Discussion and Analysis of Financial Condition and Results of Operations"and elsewhere in this Annual Report on Form 10-K. The reader should not place undue reliance on forward-looking statements, which speak only as of thedate of this report. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission, or SEC, wedo not have any intention or obligation to publicly release any revisions to forward-looking statements to reflect unforeseen or other events after the date ofthis 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 this AnnualReport on Form 10-K for the year ended December 31, 2018 and as may be supplemented by any amendments to our risk factors in our subsequent quarterlyreports on Form 10-Q and other reports filed with the SEC, which are accessible on the SEC’s website at www.sec.gov.GeneralThe following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operationsand financial position. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes includedelsewhere in this Annual Report on Form 10-K.Industry Outlook We believe continued, albeit potentially sporadic, improvement in the United States' economy will continue for 2019, given the continued jobgrowth and improvements in consumer confidence. The presidential administration certainly creates more uncertainty in the direction and trajectory ofeconomic growth. We believe a growing economy, improved job market and increased consumer confidence should help create favorable conditions for themultifamily sector. If the economy continues to improve, we expect current occupancy rates generally to remain stable, on an annual basis, as we believe thecurrent level of occupancy nationwide will be difficult to measurably improve upon. Multifamily Communities The pipeline of new multifamily construction, although increasing nationwide in recent years, may be showing signs of declining going forward, orat least plateauing. The new supply coming on line to date has been generally in line with demand in most of our markets although we have seen some areaswhere demand is falling just short of new supply. Nationally, new multifamily construction is currently at or above average historical levels in most markets.Even with the increase in new supply of multifamily properties, recent job growth and demographic trends have led to reasonable levels of absorption in mostof our markets. The absorption rate has led to generally stable occupancy rates with increases in rental rates in most of our markets. We believe the supply ofnew multifamily construction will not increase dramatically as the constraints in the market (including availability of quality sites and the difficultpermitting and entitlement process) will constrain further increases in multifamily supply. We expect that new supply peaks is at or near a peak and theseconstraints may result in a leveling out or decline in new multifamily “starts” in 2019 and 2020. As an offset, the presidential administration may loosenbanking regulation standards, which could cause an increase in available capital for new construction. Any relaxing of these regulations could lead to morecapital for new multifamily development and an increase in supply. The cost of private capital, increasing interest rates over the last twelve months, less debt46Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.capital available from traditional commercial banks for real estate loans and a softening of the market in some “Gateway” cities have all put pressure on thepricing dynamic in multifamily transactions. This could lead to an increase in capitalization rates and a softening price environment, and if this were tooccur, then our pipeline of candidate multifamily property acquisitions with returns meeting our investment objectives may expand. However, it is importantto note that, currently, equity capital for multifamily product remains available and has fueled the demand for the product which has led to the recent cap ratecompression. Currently, that availability of capital remains strong and the investment market for multifamily remains popular. Even with the recent increases in U.S. Treasury yields, competitive lender spreads have maintained a generally favorable borrowing environment formultifamily owners and developers. While the combined impact of higher indexes and lower spreads has led to a net increase in overall rates, demand formultifamily product has not yet been deterred based on debt capital costs. Given the uncertainty around the world's financial markets, fueled in part by thenew U.S. President and how his policies may affect domestic and international markets, investors have been wary in their approach to debt markets. RecentUS bond market movements have seen rates rise and spreads from the government-sponsored entity, or GSE, lenders have been relatively stable to slightlylower. Other lenders in the market have had generally stable rates as well. During 2019, we may well see spreads remaining at or near current levels as theinvestment community becomes more comfortable with the direction of the market and the US economy. Even with the recent increase in U.S. Treasury rates,we expect the market to continue to remain favorable for financing multifamily communities, as the equity and debt markets have generally continued toview the U.S. multifamily sector as a desirable investment. Lending by GSEs could be limited by caps on production or capital retention rates imposed by theFederal Housing and Finance Association, which could lead to higher lending costs, although we expect such higher costs to be offset by increased lendingactivity by other market participants; however, such other market participants may have increased costs and stricter underwriting criteria. We believe the combination of a difficult regulatory environment and high underwriting standards for commercial banks will continue to create achoppy market for new construction financing. In addition, we believe the continued hesitance among many prospective homebuyers to believe the netbenefits of home ownership are greater than the benefit of the flexibility offered through renting will continue to work in the existing multifamily sector'sfavor. We also believe there will be a continued boost to demand for multifamily rental housing due to the ongoing entry of the “millennial” generation, thesons and daughters of the babyboom generation, into the workforce. This generation has a higher statistical propensity to rent their home and stay a renterdeeper into their life-cycle, resulting in an increase in demand for rental housing. This combination of factors should generally result in gradual increases inmarket rents, lower concessions and opportunities for increases in ancillary fee income. Student Housing Properties Regarding the student housing industry, while we have not seen declining rents nationwide at the start of the 2018-2019 academic year, year overyear preleasing numbers are slightly lower nationwide. Industry reports suggest that nationally, effective rent is $658 per bed, which represents a 1.5%increase from last year. Some university markets are seeing an average increase of 11.4% in off-campus student housing inventory. There were 47,000 studenthousing beds delivered across the country in the fall of 2018, with a forecast of 45,000 off campus student housing beds for fall of 2019 delivery. Thisinventory growth remains in line with recent years. Industry reports estimate that there will be approximately 22.6 million students enrolled at US colleges by 2026. Industry reports also forecast USenrollment to grow by 1.1% annually from 2018 to 2023, while they estimate that undergraduate college enrollment will grow by an annual average of 1.5%over the next six years. We believe that the primary drivers of expanding enrollment will be moderate job growth, positive 18 to 24 year old populationgrowth, and historically high enrollment rates of 68% to 70% over the next four years among high school graduates. New Market Properties We believe that the grocery-anchored shopping center sector benefits from many of the same improving metrics as themultifamily sector, namely improved economy and job and wage growth. More specifically, the types of centers we own and plan to acquire are primarilyoccupied by grocery stores, service uses, medical providers and restaurants. We believe that these businesses are significantly less impacted by e-commercethan some other retail businesses, and that grocery anchors typically generate repeat trips to the center. We expect that current macroeconomic conditions,coupled with continued population growth in the suburban markets where our retail properties are located, will create favorable conditions for groceryshopping and other uses provided by grocery-anchored shopping centers. With moderate supply growth following a period of historically low retailconstruction starts, we believe our centers, which are all generally located in Sun Belt and Mid-Atlantic markets, are well positioned to have solid operatingfundamentals. 47Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The debt market for our grocery-anchored shopping center assets remains strong. Life insurance companies have continued to demonstrate a specificinterest in our strategy and we continue to see new participants in the market. In addition, due to some investor concern over retail in general, that allocationof capital into retail has been largely focused away from other retail product types and into the grocery-anchored sector. The result of this is that increasedcapital flows moving into the grocery-anchored sector has investors willing to accept lower yields to do so, thus putting upward pressure on prices forattractive acquisition opportunities inside our Sunbelt and Mid-Atlantic grocery-anchored strategy. Most of the growth in e-commerce around grocers is focused on “the last mile” or getting the goods in the stores to the homes of the customer. Someof our grocers have partnered with third parties (Publix and Kroger with Instacart) or formulated internal solutions (Walmart/in-store pickup and KrogerPickup) to help advance this segment of their business. We believe that the traditional grocers must be proactive in pursuing on-line solutions incombination with their bricks and mortar physical stores and we have seen our primary grocery store anchors, Publix and Kroger, react quickly andaggressively to bolster their e-commerce and delivery options, an example being Kroger's acquisition of an interest in Ocado, a UK-based company that is theworld's largest dedicated online grocery retailer that has developed a proprietary end-to-end operating solution for online grocery retail. We do believe thatthere will continue to be margin pressure on grocers and this will likely accelerate the difficulties of the weaker grocery chains. Furthermore, this could leadto increased mergers and acquisitions activity in the grocery sector which could also result in store closings or store downsizings due to store trade areaoverlap. Preferred Office Properties The office investment market continues to post healthy fundamentals across our current and target footprint, where we are primarily focused on highgrowth, non-“Gateway” markets. Due to banking reforms and conservative behavior among market participants, this cycle has been characterized by ahistorically low level of speculative office construction which is supporting continued good performance. While rising interest rates may challengecompetitors over the coming months, we are uniquely insulated in our current portfolio through long-term leases, few vacancies, long-term fixed rate debtand no sale pressure. In the event of continued interest rate hikes we would expect to see a softening cap rate environment as real estate re-prices, and seek totake advantage of that through property acquisitions.Critical Accounting PoliciesBelow is a discussion of the accounting policies that management believes are critical. We consider these policies critical because they involvesignificant management judgments, assumptions and estimates about matters that are inherently uncertain and because they are important for understandingand evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets andliabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates orassumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates thatmay impact the comparability of our results of operations to those of companies in similar businesses.Real EstateCost Capitalization. Investments in real estate properties are carried at cost and depreciated using the straight-line method over the estimated usefullives of 30 to 50 years for buildings, 5 to 20 years for building and land improvements and 5 to 10 years for computers, furniture, fixtures and equipment.Acquisition costs are generally expensed as incurred for transactions that are deemed to be business combinations. Accounting Standards Update 2017-01("ASU 2017-01"), which was released in January 2017, clarifies the definition of a business and provides further guidance for evaluating whether atransaction will be accounted for as an acquisition of an asset or a business. We adopted ASU 2017-01 as of January 1, 2017 and believe our futureacquisitions of multifamily communities, office buildings, grocery-anchored shopping centers, and student housing communities will generally qualify asasset acquisitions. Pursuant to ASU 2017-01, certain qualifying acquisition costs will be capitalized and amortized rather than expensed as incurred.Repairs, maintenance and resident turnover costs are charged to expense as incurred and significant replacements and betterments are capitalizedand depreciated over the items' estimated useful lives. Repairs, maintenance and resident turnover costs include all costs that do not extend the useful life ofthe real estate property. We consider the period of future benefit of an asset to determine its appropriate useful life.Real Estate Acquisition Valuation. We generally recorded the acquisition of income-producing real estate as a business combination. In conjunctionwith our adoption of ASU 2017-01, future acquisitions will require judgment to properly classify these acquisitions as asset acquisitions or businessacquisitions.48Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.All assets acquired and liabilities assumed in a business combination are measured at their acquisition-date fair values.We assess the acquisition-date fair values of all tangible assets, identifiable intangibles and assumed liabilities using methods similar to those usedby independent appraisers (e.g., discounted cash flow analysis) and that utilize appropriate discount and/or capitalization rates and available marketinformation. Estimates of future cash flows are based on a number of factors, including historical operating results, known and anticipated trends and marketand economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if it were vacant.We record above-market and below-market in-place lease values for acquired properties based on the difference between (i) the contractual amountsto be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over aperiod equal to the remaining average non-cancelable term of the leases. We amortize any recorded above-market or below-market lease values as a reductionor increase, respectively, to rental income over the remaining average non-cancelable term of the respective leases. The capitalized above-market leases andin place leases are included in the acquired intangible assets line of the consolidated balance sheets. Both above-market and below-market lease values areamortized as adjustments to rental revenue over the remaining term of the respective leases for office properties. The amortization period for retail shoppingcenter leases is the remaining lease term plus any below market probable renewal options.Intangible assets include the value of in-place leases, which represents the estimated value of the net cash flows of the in-place leases to be realized,as compared to the net cash flows that would have occurred had the property been vacant at the time of acquisition and subject to lease-up. These estimatesinclude estimated carrying costs, such as real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during thehypothetical expected lease-up periods.The fair values of in-place leases for retail shopping centers and office properties represent the value of direct costs associated with leasing,including opportunity costs associated with lost rentals that are avoided by acquiring in-place leases. Direct costs associated with obtaining a new tenantinclude commissions, legal and marketing costs, incentives such as tenant improvement allowances and other direct costs. Such direct costs are estimatedbased on our consideration of current market costs to execute a similar lease. The value of opportunity costs is estimated using the estimated market leaserates and the estimated absorption period of the space. These direct costs and opportunity costs are included in the accompanying consolidated balancesheets as acquired intangible assets and are amortized to expense over the remaining term of the respective leases. The fair values of above-market and below-market in-place leases for retail shopping centers and office properties are recorded based on the present value (using an interest rate which reflects the risksassociated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) our estimate of fairmarket lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the leases, taking into consideration theprobability of renewals for any below-market leases. Acquired in-place lease values for multifamily communities and student housing communities areamortized to operating expense over the average remaining non-cancelable term of the respective in-place leases.Estimating the fair values of the tangible assets, identifiable intangibles and assumed liabilities requires us to make significant assumptions toestimate market lease rates, property-operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, the number ofyears the property will be held for investment and market interest rates. The use of different assumptions would result in variations of the values of ouracquired tangible assets, identifiable intangibles and assumed liabilities, which would impact their subsequent amortization and ultimately our net income.Impairment of Real Estate and Related Intangible Assets. We monitor events and changes in circumstances that could indicate that the carryingamounts of our real estate and related intangible assets may not be recoverable or realized. When conditions suggest that an asset group may be impaired, wecompare its carrying value to its estimated undiscounted future cash flows, including proceeds from its eventual disposition. If, based on this analysis, we donot believe that we will be able to recover the carrying value of an asset group, we record an impairment to the extent that the carrying value exceeds theestimated fair value of the asset group. Fair market value is determined based on a discounted cash flow analysis. This analysis requires us to use futureestimates of net operating income, expected hold period, capitalization rates and discount rates. The use of different assumptions would result in variations ofthe values of the assets which could impact the amount of our net income and our assets on our balance sheet.Real Estate LoansWe extend loans for purposes such as to to acquire land and to provide partial financing for the development of multifamily residentialcommunities, student housing communities, grocery-anchored shopping centers and office properties and for other real estate or real estate related projects.Certain of these loans we extend include characteristics such as exclusive options to purchase the project within a specific time window following expectedproject completion and stabilization. These characteristics can cause the loans to contain variable interests and the potential of consolidation of theunderlying project as a variable interest entity, or VIE. We consider the facts and circumstances pertinent to each loan, including the relative amount offinancing we are contributing49Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.to the overall project cost, decision making rights or control we hold and our rights to expected residual gains or our obligations to absorb expected residuallosses from the project. If we are deemed to be the primary beneficiary of a VIE due to holding a controlling financial interest, the majority of decisionmaking control, or by other means, consolidation of the VIE would be required. Arriving at these conclusions requires us to make significant assumptions andjudgments concerning each project, especially with regard to our estimates of future market capitalization rates and property net operating incomeprojections. Additionally, we analyze each loan arrangement and utilize these same assumptions and judgments for consideration of whether the loanqualifies for accounting as a loan or as an investment in a real estate development project.Loan loss allowancesWe evaluate each real estate loan investment for impairment at least quarterly. Impairment occurs when it is deemed probable that we will not beable to collect all amounts due according to the contractual terms of the loan. If a loan is considered to be impaired, we record a loan loss allowance to reducethe carrying value of the loan to the present value of expected future cash flows discounted at the loan’s contractual effective rate or the fair value of thecollateral, if repayment is expected solely via liquidation of the collateral.Our loans are collateralized by real estate development projects and secured further by guaranties of repayment from one or more of the borrowers.As a result, we regularly evaluate the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateralproperty, as well as the financial and operating capability of the borrower. Specifically, a property’s operating results and any cash reserves are analyzed andused to assess (i) whether cash from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrowerto refinance the loan, and/or (iii) the property’s liquidation value. We also evaluate the financial wherewithal of any loan guarantors as well as the borrower’scompetency in managing and operating the properties. In addition, we consider the overall economic environment, real estate sector, and geographicsub‑market in which the borrower operates. Such impairment analyses are completed and reviewed by asset management and finance personnel, who utilizevarious data sources, including periodic financial data such as property operating statements, occupancy, tenant profile, rental rates, operating expenses, theborrower’s exit plan, and capitalization and discount rates and site inspections.Revenue RecognitionWe generally lease apartment units under leases with terms of thirteen months or less. We generally lease retail properties and office building suitesfor rental terms of several years. Rental revenue, net of concessions, is recognized on a straight-line basis over the term of the lease. Differences from thestraight-line method, which recognize the effect of any up-front concessions and other adjustments ratably over the lease term, are recorded in the appropriateperiod, to the extent that adjustments to the straight-line method are material.Revenue from reimbursements of retail and office building tenants' share of real estate taxes, insurance and common area maintenance, or CAM,costs are recognized as the respective costs are incurred in accordance with the lease agreements. We estimate the collectability of the receivable related torental and reimbursement billings due from tenants and straight-line rent receivables, which represent the cumulative amount of future adjustments necessaryto present rental income on a straight-line basis, by taking into consideration our historical write-off experience, tenant credit-worthiness, current economictrends, and remaining lease terms.We recognize gains on sales of real estate based on the difference between the consideration received and the carrying amount of the distinct asset,including the carrying amount of any liabilities relieved or assumed by the purchasing counterparty.Other income, including interest earned on our cash, is recognized as it is earned. We recognize interest income on real estate loans on an accrualbasis over the life of the loan. Loan origination fees received from borrowers as incentive to extend the real estate loans (excluding the amounts paid to theManager), are amortized over the life of the loan as an additive adjustment to interest income using the effective interest method. We stop accruing intereston loans when circumstances indicate that it is probable that the ultimate collection of all principal and interest due according to the loan agreement will notbe realized, which is generally a delinquency of 30 days in required payments of interest or principal. Any payments received on such non-accrual loans arerecorded as interest income or as a reduction of principal, depending upon the circumstances, when the payments are received. Interest accrual on real estateloan investments is resumed once interest and principal payments become current.50Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.New Accounting PronouncementsFor a discussion of our adoption of new accounting pronouncements, please see Note 2 of our Consolidated Financial Statements.Results of OperationsCertain financial highlights of our results of operations for the three-month and twelve-month periods ended December 31, 2018 were: Three months ended December31, Years ended December 31, 2018 2017 % change 2018 2017 % change Revenues (in thousands)$106,280 $81,652 30.2% $397,271 $294,005 35.1% Per share data: Net income (loss) (1)$0.06 $(0.60) — $(1.08) $(1.13) — FFO (2)$0.38 $0.31 22.6% $1.41 $1.32 6.8% AFFO (2)$0.48 $0.31 54.8% $1.33 $1.17 13.7% Dividends (3)$0.26 $0.25 4.0% $1.02 $0.94 8.5% (1) Per weighted average share of Common Stock outstanding for the periods indicated.(2) FFO and AFFO results are presented per weighted average share of Common Stock and Class A Unit in our Operating Partnership outstanding for the periods indicated.(3) Per share of Common Stock and Class A Unit outstanding. •For the year ended December 31, 2018, our FFO payout ratio to Common Stockholders and Unitholders was approximately 73.0% and our FFO payoutratio (before the deduction of preferred dividends) to our preferred stockholders was approximately 60.0%. For the fourth quarter 2018, our FFO payoutratio to Common Stockholders and Unitholders was approximately 68.9% and our FFO payout ratio (before the deduction of preferred dividends) to ourpreferred stockholders was approximately 59.9%. (A) •For the year ended December 31, 2018, our AFFO payout ratio to Common Stockholders and Unitholders was approximately 77.5% and our AFFOpayout ratio (before the deduction of preferred dividends) to our preferred stockholders was approximately 61.4%. For the fourth quarter 2018, ourAFFO payout ratio to Common Stockholders and Unitholders was approximately 54.4% and our AFFO payout ratio (before the deduction of preferreddividends) to our preferred stockholders was approximately 54.1%. (B) •At December 31, 2018, the market value of our common stock was $14.06 per share. A hypothetical investment in our Common Stock in our initialpublic offering on April 5, 2011, assuming the reinvestment of all dividends and no transaction costs, would have resulted in an average annual returnof approximately 16.7% through December 31, 2018.•As of December 31, 2018, the average age of our multifamily communities was approximately 4.3 years, which is the youngest in the public multifamilyREIT industry.•Approximately 90.0% of our permanent property-level mortgage debt has fixed interest rates and approximately 6.0% has variable interest rates whichare capped. In addition, we plan to refinance the remaining uncapped variable rate mortgage debt into new fixed rate instruments during 2019. Webelieve we are well protected against potential increases in market interest rates.•At December 31, 2018, our leverage, as measured by the ratio of our debt to the undepreciated book value of our total assets, was approximately 54.4 %.Our leverage calculation excludes the gross assets of approximately $269.9 million and liabilities of approximately $264.9 million that weconsolidated as a result of our investment in the ML-04 pool from the Freddie Mac K program.•As of December 31, 2018, our total assets were approximately $4.4 billion compared to approximately $3.3 billion as of December 31, 2017, an increaseof approximately $1.1 billion, or approximately 35.6%. This growth was driven primarily51Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.by the acquisition of 17 real estate properties (partially offset by the sale of 4 properties). In addition, our assets increased due to the consolidation ofthe ML-04 pool from the Freddie Mac K program. Excluding the assets consolidated from the ML-04 pool, our assets grew approximately $893.7million, or 27.5% since December 31, 2017.•Cash flow from operations for the year ended December 31, 2018 was approximately $145.4 million, an increase of approximately $59.1 million, or68.4%, compared to cash flow provided by operations of approximately $86.3 million for the year ended December 31, 2017. Cash flow from operationsfor the year 2018 was more than sufficient to fund our aggregate dividends and distributions for the year, which totaled approximately $128.9 million.Cash flow from operations for the quarter ended December 31, 2018 was approximately $33.4 million, an increase of approximately $17.6 million, or110.9%, compared to cash flow provided by operations of approximately $15.8 million for the quarter ended December 31, 2017.•On November 30, 2018, we closed on a real estate loan investment of up to approximately $30.3 million and a senior construction loan of up toapproximately $37.3 million, both in support of the development of a Class A office building with approximately 187,000 rentable square feet inAtlanta, Georgia.•During the fourth quarter 2018, we closed on two real estate loan investments aggregating approximately $30.3 million, one supporting a multifamilycommunity to be located in Jacksonville, Florida and another supporting a student housing property to be located in Atlanta, Georgia.•On October 23, 2018, we sold our Stoneridge Farms at the Hunt Club multifamily community located in Nashville, Tennessee for a net gain ofapproximately $16.8 million, which resulted in an internal rate of return of approximately 21% from September 26, 2014, the date the property wasacquired. (C) •On December 11, 2018, we sold our McNeil Ranch multifamily community located in Austin, Texas for a net gain of approximately $13.9 million,which resulted in an internal rate of return of approximately 19% from January 24, 2013, the date the property was acquired. (C) (A) We calculate the FFO payout ratio to Common Stockholders as the ratio of Common Stock dividends and distributions to FFO Attributable to Common Stockholders andUnitholders. We calculate the FFO payout ratio to preferred stockholders as the ratio of Preferred Stock dividends to the sum of Preferred Stock dividends and FFO. Since ouroperations resulted in a net loss from continuing operations for the periods presented, a payout ratio based on net loss is not calculable. See Definitions of Non-GAAP Measures.(B) We calculate the AFFO payout ratio to Common Stockholders as the ratio of Common Stock dividends and distributions to AFFO. We calculate the AFFO payout ratio to preferredstockholders as the ratio of Preferred Stock dividends to the sum of Preferred Stock dividends and AFFO.(C) Our IRR calculations are based on equity invested and are net of fees paid to the Manager and disposition costs.52Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Real Estate Loan InvestmentsCertain real estate loan investments include limited purchase options and additional amounts of accrued interest, which becomes due in cash to uson 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 theproject 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 nocontingent events that are necessary to occur for us to realize the additional interest amounts. We hold options, but not obligations, to purchase certain ofthe 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 theloan closing and are to be calculated based upon market cap rates at the time of exercise of the purchase option, with discounts ranging from between 10and 60 basis points, depending on the loan. As of December 31, 2018, our actual and potential purchase option portfolio consisted of: Total unitsupon Purchase option window Project/PropertyLocation completion (1) Begin End Multifamily communities: PalisadesNorthern VA 304 5/1/2019 5/31/2019 Fort MyersFort Myers, FL 224 S + 90 days (2) S + 150 days (2) WiregrassTampa, FL 392 S + 90 days (2) S + 150 days (2) 360 ForsythAtlanta, GA 356 S + 90 days (2) S + 150 days (2) MorosgoAtlanta, GA 258 S + 90 days (2) S + 150 days (2) University City GatewayCharlotte, NC 338 S + 90 days (2) S + 150 days (2) The AnsonNashville, TN 301 S + 90 days (2) S + 150 days (2) Cameron ParkAlexandria, VA 302 S + 90 days (2) S + 150 days (2) SouthpointFredericksburg, VA 240 S + 90 days (2) S + 150 days (2) DuvalJacksonville, FL 332 S + 90 days (3) S + 150 days (3) Student housing properties: Solis KennesawAtlanta, GA 248 (4) (4) Solis Kennesaw IIAtlanta, GA 175 (5) (5) Office property: 8WestAtlanta, GA (6) (6) (6) 3,470 (1) We evaluate each project individually and we make no assurance that we will acquire any of the underlyingproperties from our real estate loan investment portfolio. The purchase options held by us on the Bishop Street,Hidden River, and Haven Charlotte projects were terminated, in exchange for an aggregate $6.7 million intermination fees from the developers. (2) The option period window begins and ends at the number of days indicated beyond the achievement of a 93%physical occupancy rate by the underlying property. (3) The option period window begins on the earlier of June 21, 2024 and the number of days indicated beyond theachievement of a 93% physical occupancy rate by the underlying property. (4) The option period begins on October 1 of the second academic year following project completion and ends on thefollowing December 31. The developer may elect to expedite the option period to begin December 1, 2019 and endon December 31, 2019. (5) The option period begins on October 1 of the second academic year following project completion and ends on thefollowing December 31. The developer may elect to expedite the option period to begin December 1, 2020 and endon December 31, 2020. (6) The project plans are for the construction of a class A office building consisting of approximately 187,000 rentablesquare feet; our purchase option window opens 90 days following the achievement of 90% lease commencement andends on November 30, 2024 (subject to adjustment). Our purchase option is at the to-be-agreed-upon market value.In the event the property is sold to a third party, we would be due a fee based on a minimum multiple of 1.15 timesthe amount drawn on the real estate loan investment, less the amounts of principal and accrued interest repaid. 53Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Year Ended December 31, 2018 compared to 2017 and Year Ended December 31, 2017 compared to 2016The following discussion and tabular presentations highlight the major drivers behind the line item changes in our results of operations for the yearended December 31, 2018 versus 2017 and the year ended December 31, 2017 versus 2016:Preferred Apartment Communities, Inc. Year Ended December 31, Change inc (dec) 2018 2017 Amount PercentageRevenues: Rental revenues $280,079 $200,462 $79,617 39.7 %Other property revenues 51,386 36,641 14,745 40.2 %Interest income on loans and notes receivable 50,190 35,698 14,492 40.6 %Interest income from related parties 15,616 21,204 (5,588) (26.4)%Total revenues 397,271 294,005 103,266 35.1 % Operating expenses: Property operating and maintenance 44,065 29,903 14,162 47.4 %Property salary and benefits 17,766 13,272 4,494 33.9 %Property management fees 11,681 8,329 3,352 40.2 %Real estate taxes 42,035 31,281 10,754 34.4 %General and administrative 8,224 6,490 1,734 26.7 %Equity compensation to directors and executives 1,703 3,470 (1,767) (50.9)%Depreciation and amortization 171,136 116,777 54,359 46.5 %Acquisition and pursuit costs — 14 (14) —Asset management and general and administrative expense fees to related parties 27,541 20,226 7,315 36.2 %Loan loss allowance 2,533 — 2,533 —Insurance, professional fees and other expenses 7,166 6,584 582 8.8 % Total operating expenses 333,850 236,346 97,504 41.3 %Waived asset management and general and administrative expense fees (6,656) (1,729) (4,927) — Net operating expenses 327,194 234,617 92,577 39.5 %Operating income before gains on sales of real estate and trading investments 70,077 59,388 10,689 18.0 %Gain on sale of real estate and trading investment 69,705 37,635 32,070 85.2 %Operating income 139,782 97,023 42,759 44.1 %Interest expense 95,564 67,468 28,096 41.6 %Change in fair value of net assets of consolidated VIE from mortgage-backed pool 320 — 320 —Loss on debt extinguishment — 888 (888) —Net income 44,538 28,667 15,871 55.4 %Consolidated net (income) attributable to non-controllinginterests (1,071) (986) (85) 8.6 % Net income attributable to the Company $43,467 $27,681 $15,786 57.0 %54Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc. Year Ended December 31, Change inc (dec) 2017 2016 Amount PercentageRevenues: Rental revenues $200,462 $137,331 $63,131 46.0 %Other property revenues 36,641 19,302 17,339 89.8 %Interest income on loans and notes receivable 35,698 28,841 6,857 23.8 %Interest income from related parties 21,204 14,645 6,559 44.8 %Total revenues 294,005 200,119 93,886 46.9 % Operating expenses: Property operating and maintenance 29,903 19,982 9,921 49.6 %Property salary and benefits 13,272 10,399 2,873 27.6 %Property management fees 8,329 5,981 2,348 39.3 %Real estate taxes 31,281 21,594 9,687 44.9 %General and administrative 6,490 4,558 1,932 42.4 %Equity compensation to directors and executives 3,470 2,524 946 37.5 %Depreciation and amortization 116,777 78,140 38,637 49.4 %Acquisition and pursuit costs 14 8,547 (8,533) (99.8)%Asset management and general and administrative expense fees to related parties 20,226 13,637 6,589 48.3 %Insurance, professional fees and other expenses 6,584 6,173 411 6.7 % Total operating expenses 236,346 171,535 64,811 37.8 %Waived asset management and general and administrative expense fees (1,729) (1,586) (143) — Net operating expenses 234,617 169,949 64,668 38.1 %Operating income before gains on sales of real estate and trading investments 59,388 30,170 29,218 96.8 %Gain on sale of real estate 37,635 4,271 33,364 781.2 %Operating income 97,023 34,441 62,582 181.7 %Interest expense 67,468 44,284 23,184 52.4 %Loss on extinguishment of debt 888 — 888 —Net income (loss) 28,667 (9,843) 38,510 —Consolidated net (income) loss attributable to non-controllinginterests (986) 310 (1,296) — Net income (loss) attributable to the Company $27,681 $(9,533) $37,214 —55Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.New Market Properties, LLCOur New Market Properties, LLC business consists of our portfolio of grocery-anchored shopping centers and our Dawson Marketplace real estateloan supporting a shopping center in the Atlanta, Georgia market. Comparative statements of operations of New Market Properties, LLC for the years ended(i) December 31, 2018 versus 2017 and (ii) December 31, 2017 versus 2016 are presented below. These statements of operations include no allocations ofcorporate overhead or other expenses.New Market Properties, LLC Year Ended December 31, Change inc (dec) 2018 2017 Amount PercentageRevenues: Rental revenues $56,654 $43,168 $13,486 31.2 %Other property revenues 18,578 13,724 4,854 35.4 %Interest income on loans and notes receivable 2,011 1,758 253 14.4 %Total revenues 77,243 58,650 18,593 31.7 % Operating expenses: Property operating and maintenance 8,571 5,759 2,812 48.8 %Property management fees 2,741 1,925 816 42.4 %Real estate taxes 9,296 7,734 1,562 20.2 %General and administrative 924 688 236 34.3 %Equity compensation to directors and executives 149 425 (276) (64.9)%Depreciation and amortization 39,269 30,088 9,181 30.5 %Acquisition and pursuit costs — 25 (25) (100.0)%Asset management and general and administrative expense fees to related parties 5,743 4,436 1,307 29.5 %Insurance, professional fees and other expenses 1,126 657 469 71.4 %Total operating expenses 67,819 51,737 16,082 31.1 %Waived asset management and general and administrative expense fees (375) (108) (267) 247.2 %Net operating expenses 67,444 51,629 15,815 30.6 % Operating income 9,799 7,021 2,778 39.6 %Interest expense 19,188 14,895 4,293 28.8 %Net loss $(9,389) $(7,874) $(1,515) 19.2 %56Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.New Market Properties, LLC Year Ended December 31, Change inc (dec) 2017 2016 Amount PercentageRevenues: Rental revenues $43,168 $26,313 $16,855 64.1 %Other property revenues 13,724 7,410 6,314 85.2 %Interest income on loans and notes receivable 1,758 1,768 (10) (0.6)%Total revenues 58,650 35,491 23,159 65.3 % Operating expenses: Property operating and maintenance 5,759 3,547 2,212 62.4 %Property management fees 1,925 1,159 766 66.1 %Real estate taxes 7,734 3,725 4,009 107.6 %General and administrative 688 540 148 27.4 %Equity compensation to directors and executives 425 82 343 418.3 %Depreciation and amortization 30,088 19,246 10,842 56.3 %Acquisition and pursuit costs 25 2,103 (2,078) (98.8)%Asset management and general and administrative expense fees to related parties 4,436 2,666 1,770 66.4 %Insurance, professional fees and other expenses 657 546 111 20.3 %Total operating expenses 51,737 33,614 18,123 53.9 %Waived asset management and general and administrative expense fees (108) (273) 165 (60.4)%Net operating expenses 51,629 33,341 18,288 54.9 % Operating income 7,021 2,150 4,871 226.6 %Interest expense 14,895 8,870 6,025 67.9 %Net loss $(7,874) $(6,720) $(1,154) 17.2 %57Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Recent acquisitionsOur acquisitions of the following real estate assets since January 1, 2018 were the primary drivers behind our increases in rental and property revenues andproperty operating expenses for the year ended December 31, 2018 versus 2017. and December 31, 2017 versus 2016. Acquisition date Property Location Units Beds Leasablesquare feet Multifamily communities: 1/9/2018 The Lux at Sorrel Jacksonville, FL 265 n/a n/a 2/28/2018 Green Park Atlanta, GA 310 n/a n/a 9/27/2018 The Lodge at Hidden River Tampa, FL 300 n/a n/a 11/9/2018 Vestavia Reserve Birmingham, AL 272 n/a n/a 11/15/2018 CityPark View South (1) Charlotte, NC 200 n/a n/a New Market Properties: 4/27/2018 Greensboro Village Nashville, TN n/a n/a 70,203 4/27/2018 Governors Towne Square Atlanta, GA n/a n/a 68,658 6/26/2018 Neapolitan Way Naples, FL n/a n/a 137,580 6/29/2018 Conway Plaza Orlando, FL n/a n/a 117,705 7/6/2018 Brawley Commons Charlotte, NC n/a n/a 122,028 12/21/2018 Hollymead Town Center Charlottesville, VA n/a n/a 158,807 Student housing properties: 5/10/2018 The Tradition College Station, TX 427 808 n/a 5/31/2018 The Retreat at Orlando Orlando, FL 221 894 n/a 6/27/2018 The Bloc Lubbock, TX 140 556 n/a Preferred Office Properties: 1/29/2018 Armour Yards Atlanta, GA n/a n/a 187,000 7/31/2018 150 Fayetteville Raleigh, NC n/a n/a 560,000 12/20/2018 Capitol Towers Charlotte, NC n/a n/a 479,000 2,135 2,258 1,900,981 (1) CityPark View South is a second phase of an existing property, and shares a leasing office with the original phase. Therefore, it is not counted as a separateproperty.Our acquisitions of the following real estate assets during 2017 were the primary drivers behind our increases in rental and property revenues andproperty operating expenses for the year ended December 31, 2017 versus 2016.58Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Acquisitiondate Property Location Units Beds Leasablesquare feet Multifamily communities: 3/3/2017 Broadstone at Citrus Village Tampa, FL 296 n/a n/a 3/24/2017 Retreat at Greystone Birmingham, AL 312 n/a n/a 3/31/2017 Founders Village Williamsburg, VA 247 n/a n/a 4/26/2017 Claiborne Crossing Louisville, KY 242 n/a n/a 7/26/2017 Luxe at Lakewood Ranch Sarasota, FL 280 n/a n/a 9/27/2017 Adara Overland Park Kansas City, KS 260 n/a n/a 9/29/2017 Aldridge at Town Village Atlanta, GA 300 n/a n/a 9/29/2017 The Reserve at Summit Crossing Atlanta, GA 172 n/a n/a 11/21/2017 Overlook at Crosstown Walk Tampa, FL 180 n/a n/a 12/20/2017 Colony at Centerpointe Richmond, VA 255 n/a n/a New Market Properties: 4/21/2017 Castleberry-Southard Atlanta, GA n/a—n/a 80,018 6/6/2017 Rockbridge Village Atlanta, GA n/a—n/a 102,432 7/26/2017 Irmo Station Columbia, SC n/a—n/a 99,384 8/25/2017 Maynard Crossing Raleigh, NC n/a—n/a 122,781 9/8/2017 Woodmont Village Atlanta, GA n/a—n/a 85,639 9/22/2017 West Town Market Charlotte, NC n/a n/a 67,883 11/30/2017 Roswell Wieuca ShoppingCenter Atlanta, GA n/a n/a 74,370 12/5/2017 Crossroads Market Naples, FL n/a n/a 126,895 Student housing propertie: 2/28/2017 Sol Tempe, AZ 224 639 n/a 10/27/2017 Stadium Village (1) Atlanta, GA 198 792 n/a 12/18/2017 Ursa (1) Waco, TX 250 840 n/a Preferred Office Properties: 11/13/2017 Westridge at La Cantera San Antonio, TX n/a n/a 258,000 3,216 2,271 1,017,402 (1) The Company acquired and owns an approximate 99% equity interest in a joint venture whichowns both Stadium Village and Ursa. Rental RevenuesRental revenue increased due primarily to properties acquired during 2018 and 2017, as shown in the following table: Year Ended December 31, 2018 versus 2017 2017 versus 2016 Increase IncreaseRental revenues Amount(rounded to000s): Percent ofincrease Amount(rounded to000s): Percent ofincreaseProperties acquired in 2018 $34,440 43.3 % $— — %Properties acquired in 2017 46,853 58.8 % 27,076 42.9 %Properties acquired in 2016 3,240 4.1 % 47,951 76.0 %Properties acquired in 2011 - 2015 2,423 3.0 % 81 0.1 %Properties sold (7,339) (9.2)% (11,977) (19.0)% Total $79,617 100.0 % $63,131 100.0 %Increases in occupancy rates and in percentages of leased space and rent growth are the primary drivers of increases in rental revenue from our ownedproperties. Factors which we believe affect market rents include vacant unit inventory in local markets, local and national economic growth and resultantemployment stability, income levels and growth, the ease of obtaining credit for home purchases, and changes in demand due to consumer confidence in theSource: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.above factors.59Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.We also collect revenue from residents and tenants for items such as utilities, application fees, lease termination fees, common area maintenancereimbursements and late charges. The increases in other property revenues for the year ended December 31, 2018 versus 2017 were primarily due to theacquisitions listed above.Interest income from our real estate loan investments decreased for the year ended December 31, 2018 versus 2017 and primarily due to therepayment during 2018 of real estate loans which supported ten projects that had an aggregate drawn amount at December 31, 2017 of approximately $198.6million versus the addition of new loans during 2018 with an aggregate drawn amount of approximately $136.1 million supporting eight projects.Interest income from our real estate loan investments increased for the year ended December 31, 2017 versus 2016, primarily due to the addition ofour Berryessa real estate loan, which had a drawn amount of approximately $30.6 million at December 31, 2017. Also contributing to the increase in interestincome were higher loan balances on real estate loans, from accumulating draws and loan balances as the underlying projects progressed toward completion.The principal amounts outstanding on our portfolio of real estate loans and bridge loans were approximately $336.3 million, $388.5 million and $334.6million at December 31, 2018, 2017 and 2016, respectively.We recorded interest income and other revenue from these instruments as presented in Note 5 to the Company's Consolidated Financial Statements. Property operating and maintenance expenseExpenses to operate and maintain our properties rose primarily due to the incremental costs brought on by property acquisitions during 2018 and2017, as shown in the following table. The primary components of operating and maintenance expense are utilities, property repairs, and landscaping costs.The expenses incurred for property repairs and, to a lesser extent, utilities could generally be expected to increase gradually over time as the buildings andproperties age. Utility costs may generally be expected to increase in future periods as rate increases from providing carriers are passed on to our residents andtenants. Year Ended December 31, 2018 versus 2017 2017 versus 2016 Increase IncreaseProperty operating andmaintenance expense Amount(rounded to000s): Percent ofincrease Amount(rounded to000s): Percent ofincreaseProperties acquired in 2018 $6,301 44.5 % $— — %Properties acquired in 2017 7,142 50.4 % 4,694 47.2 %Properties acquired in 2016 882 6.2 % 7,506 75.7 %Properties acquired in 2011 - 2015 1,042 7.4 % (103) (1.0)%Properties sold (1,205) (8.5)% (2,176) (21.9)% Total $14,162 100.0 % $9,921 100.0 %Property salary and benefitsWe recorded property salary and benefits expense for individuals who handle the on-site management, operations and maintenance of our properties.These costs increased primarily due to the incremental costs brought on by additional personnel necessary to manage and operate properties acquired during2018 and 2017, as shown in the following table. Year Ended December 31, 2018 versus 2017 2017 versus 2016 Increase IncreaseProperty salary and benefits Amount(rounded to000s): Percent ofincrease Amount(rounded to000s): Percent ofincreaseProperties acquired in 2018 $2,027 45.1 % $— — %Properties acquired in 2017 3,232 71.9 % 2,248 78.3 %Properties acquired in 2016 (73) (1.6)% 1,830 63.7 %Properties acquired in 2011 - 2015 122 2.7 % (11) (0.4)%Properties sold (814) (18.1)% (1,194) (41.6)% Total $4,494 100.0 % $2,873 100.0 %60Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Property management feesWe pay a fee for property management services to our Manager in an amount of 4% of gross property revenues as compensation for services such asrental, leasing, operation and management of our multifamily communities and the supervision of any subcontractors; for grocery-anchored shopping centerassets, property management fees are generally 4% of gross property revenues, of which generally 3.5% is paid to a third party management company.Property management fees for office building assets are within the range of 2.0% to 2.75% of gross property revenues, of which 1.5% to 2.25% is paid to athird party management company. The increases were primarily due to properties acquired during 2018 and 2017, as shown in the following table. Year Ended December 31, 2018 versus 2017 2017 versus 2016 Increase IncreaseProperty management fees Amount(rounded to000s): Percent ofincrease Amount(rounded to000s): Percent ofincreaseProperties acquired in 2018 $1,245 37.2 % $— — %Properties acquired in 2017 2,076 61.9 % 1,135 48.3 %Properties acquired in 2016 268 8.0 % 1,679 71.5 %Properties acquired in 2011 - 2015 102 3.0 % 46 2.0 %Properties sold (339) (10.1)% (512) (21.8)% Total $3,352 100.0 % $2,348 100.0 %Real estate taxesWe are liable for property taxes due to the various counties and municipalities that levy such taxes on real property for each of our properties. Realestate taxes rose primarily due to the incremental costs brought on by properties acquired during 2018 and 2017, as shown in the following table: Year Ended December 31, 2018 versus 2017 2017 versus 2016 Increase IncreaseReal estate taxes Amount(rounded to000s): Percent ofincrease Amount(rounded to000s): Percent ofincreaseProperties acquired in 2018 $4,438 41.2 % $— — %Properties acquired in 2017 7,663 71.3 % 3,017 31.2 %Properties acquired in 2016 177 1.6 % 8,281 85.5 %Properties acquired in 2011 - 2015 (422) (3.9)% 295 3.0 %Properties sold (1,102) (10.2)% (1,906) (19.7)% Total $10,754 100.0 % $9,687 100.0 % We generally expect the assessed values of our properties to rise over time, owing to our expectation of improving market conditions, as well aspressure on municipalities to raise revenues. 61Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.General and AdministrativeThe increase was primarily due to administrative expenses related to the properties acquired during 2018 and 2017, as shown in the following table: Year Ended December 31, 2018 versus 2017 2017 versus 2016 Increase IncreaseGeneral and administrative expense Amount(rounded to000s): Percent ofincrease Amount(rounded to000s): Percent ofincreaseTaxes, licenses & fees $(219) (12.7)% $(15) (0.7)%Properties acquired in 2018 939 54.2 % — — %Properties acquired in 2017 873 50.3 % 746 38.6 %Properties acquired in 2016 261 15.1 % 1,247 64.5 %Properties acquired in 2011 - 2015 81 4.7 % 214 11.1 %Properties sold (201) (11.6)% (260) (13.5)% Total $1,734 100.0 % $1,932 100.0 %Equity compensation to directors and executivesExpenses recorded for equity compensation awards decreased for the year ended December 31, 2018 versus 2017 due primarily to thevoluntary forfeiture by certain of our executives of 128,258 Class B Units awarded in 2018, which had an aggregate fair value of approximately $2.1million, as well as additional forfeitures of 66,332 Class B Units with a fair value of approximately $1.1 million, which were forfeited throughinvoluntary terminations, retirements, and the passing of John A. Williams. Expenses recorded for equity compensation awards for the year endedDecember 31, 2017 versus 2016 increased primarily due to expansions of Class B Unit awards in 2017, the details of which are presented in Note 9to the Consolidated Financial Statements.Depreciation and amortizationThe net increases in depreciation and amortization were driven by: Year Ended December 31, 2018 versus 2017 2017 versus 2016 Increase IncreaseDepreciation and amortization Amount(rounded to000s): Percent ofincrease Amount(rounded to000s): Percent ofincreaseProperties acquired in 2018 $31,872 58.7 % $— — %Properties acquired in 2017 29,753 54.7 % 28,395 73.6 %Properties acquired in 2016 (3,857) (7.1)% 18,635 48.2 %Properties acquired in 2011 - 2015 (805) (1.5)% (3,930) (10.2)%Properties sold (2,604) (4.8)% (4,463) (11.6)% Total $54,359 100.0 % $38,637 100.0 %Acquisition and pursuit costs and acquisition fees to related partiesThe decrease in acquisition fees during the year ended December 31, 2017 versus 2016 was due to the adoption of ASU 2017-01 on January 1, 2017,pursuant to which we began capitalizing and amortizing asset acquisition costs.Asset management fees and general and administrative fees to related partyMonthly asset management fees are equal to one-twelfth of 0.50% of the total book value of assets, as adjusted. General and administrative expensefees are equal to 2% of the monthly gross revenues of the Company. Both are calculated as prescribed by the Management Agreement and are paid monthlyto our Manager. These fees rose primarily due to the incremental assets and62Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.revenues brought on by acquired office buildings, grocery-anchored shopping centers, student housing properties and multifamily communities listedpreviously. Insurance, professional fees and other expensesThe increases consisted of: Year Ended December 31, 2018 versus 2017 2017 versus 2016 Increase IncreaseInsurance, professional fees, and otherexpenses Amount(rounded to000s): Percent ofincrease Amount(rounded to000s): Percent ofincreaseAudit and tax fees $(76) (13.1)% $(77) (18.8)%Insurance premiums 480 82.5 % 941 229.0 %Board of directors fees — — % 170 41.4 %Software implementation fees 6 1.0 % (216) (52.6)%Legal fees 182 31.3 % (591) (143.8)%Other professional fees (10) (1.7)% 184 44.8 % Total $582 100.0 % $411 100.0 %Contingent asset management and general and administrative expense feesThe Manager may, in its discretion, forfeit some or all of the asset management, property management, or general and administrative fees forproperties owned by the Company. The forfeited fees are converted at the time of forfeiture into contingent fees, which are earned by the Manager only in theevent of a sales transaction, and whereby the Company’s capital contributions for the property being sold exceed a 7% annual rate of return. The Companywill recognize in future periods to the extent, if any, it determines that the sales transaction is probable, and that the estimated net sale proceeds would exceedthe annual rate of return hurdle.On May 25, 2017,we closed on the sale of our Enclave at Vista Ridge multifamily community to an unrelated third party. At such date, the Managercollected a cumulative total of approximately $390,000 of waived fees. Similarly, on October 23, 2018, we closed on the sale of the Stoneridge Farms at theHunt Club multifamily community to an unrelated third party. At such date, the Manager collected a cumulative total of approximately $465,000 of waivedfees as a disposition fee. The sales transactions, and the fact that the Company’s capital contributions for the property achieved a greater than 7% annual rateof return, triggered the fees to become immediately due and payable to the Manager at the closing of these sale transactions. Interest expenseThe increases consisted of: Year Ended December 31, 2018 versus 2017 2017 versus 2016 Increase IncreaseInterest expense Amount(rounded to000s): Percent ofincrease Amount(rounded to000s): Percent ofincreaseProperties acquired in 2018 $12,189 43.3 % $— — %Properties acquired in 2017 15,955 56.8 % 9,210 39.8 %Properties acquired in 2016 1,538 5.5 % 15,139 65.3 %Properties acquired in 2011 - 2015 500 1.8 % 695 3.0 %Properties sold (1,715) (6.1)% (3,030) (13.1)%KeyBank operating LOC and Term note (507) (1.8)% 884 3.8 %Loan participants 136 0.5 % 286 1.2 % Total $28,096 100.0 % $23,184 100.0 %See the sections entitled Contractual Obligations and Item 7A Quantitative and Qualitative Disclosures About Market Risk located elsewhere in thisAnnual Report on Form 10-K.63Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Definitions of Non-GAAP MeasuresWe disclose FFO and AFFO, each of which meet the definition of a “non-GAAP financial measure”, as set forth in Item 10(e) of Regulation S-Kpromulgated 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 measuresprovides useful information to investors. None of FFO and AFFO should be considered as an alternative to net income (determined in accordance with GAAP)as an indication of our performance, and we believe that to understand our performance further FFO and AFFO should be compared with our reported netincome or net loss and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated financial statements. FFO and AFFOare 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,” whichwas restated in 2018, the National Association of Real Estate Investment Trusts, or NAREIT, standardized the definition of how Net income/loss should beadjusted to arrive at FFO, in the interests of uniformity and comparability. We have adopted the NAREIT definition for computing FFO as a meaningfulsupplemental 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 inthe 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 reportedFFO results to those of other companies. The Company’s FFO results are comparable to the FFO results of other companies that follow the NAREIT definitionof 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 availableto common stockholders.Adjusted Funds From Operations Attributable to Common Stockholders and Unitholders (“AFFO”)AFFO makes further adjustments to FFO results in order to arrive at a more refined measure of operating and financial performance. There is noindustry standard definition of AFFO and practice is divergent across the industry. The Company calculates AFFO as:FFO, plus:• non-cash equity compensation to directors and executives;• amortization of loan closing costs;• losses on debt extinguishments or refinancing costs;• weather-related property operating losses;• amortization of loan coordination fees paid to the Manager;• depreciation and amortization of non-real estate assets;• net loan fees received;• accrued interest income received;• allowances for loan loss reserves;• cash received for purchase option terminations (net of revenues recorded);• deemed dividends on preferred stock redemptions;• non-cash dividends on Series M Preferred Stock; and• amortization of lease inducements;Less:• non-cash loan interest income;• cash paid for loan closing costs;• amortization of acquired real estate intangible liabilities;• amortization of straight line rent adjustments and deferred revenues; and64Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.• 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 theoperating performance of our portfolio of real estate assets. We believe AFFO is useful to investors as a supplemental gauge of our operating performance andmay be useful in comparing our operating performance with other real estate companies. AFFO is a non-GAAP measure that is reconciled to its mostcomparable GAAP measure, net income/loss available to common stockholders. FFO and AFFO are not considered measures of liquidity and are notalternatives to measures calculated under GAAP.65Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Reconciliation of FFO Attributable to Common Stockholders and Unitholders and AFFOto Net (Loss) Income Attributable to Common Stockholders (A) Three months ended December 31,(In thousands, except per-share figures) 2018 2017 2016 Net income (loss) attributable to common stockholders (See note 1)$2,641 $(22,243) $(16,590) Add:Depreciation of real estate assets 34,309 24,941 16,890 Amortization of acquired real estate intangible assets and deferred leasingcosts9,173 9,386 6,124 Net income (loss) attributable to non-controlling interests (See note 2)615 (111) (135)Less:Gain on sale of real estate (30,682) — —FFO attributable to common stockholders and unitholders16,056 11,973 6,289 Add:Acquisition and pursuit costs— — 1,662 Loan cost amortization on acquisition term note20 29 27 Amortization of loan coordination fees paid to the Manager (See note 3)707 421 318 (Insurance recoveries in excess of) weather-related property operating losses (See note 4)(237) 681 — Contingent management fees recognized206 — — Payment of costs related to property refinancing227 684 — Non-cash equity compensation to directors and executives(1,178) 863 656 Amortization of loan closing costs (See note 5) 1,234 793 819 Depreciation/amortization of non-real estate assets 444 263 145 Net loan fees received (See note 6) 707 18 497 Accrued interest income received (See note 7) 12,266 4,697 — (Decrease in) loan loss allowance (See note 8) (496) — — Amortization of lease inducements (See note 9) 426 200 — Non-cash dividends on Preferred Stock 17 30 — Cash received in excess of amortization of purchase option termination revenues (See note 10)1,044 — —Less:Non-cash loan interest income (See note 7) (4,611) (4,557) (4,228) Non-cash revenues from mortgage-backed securities (135) — — Cash paid for loan closing costs (1,073) (28) (215) Amortization of acquired above and below market lease intangibles and straight-line rental revenues (See note 11) (2,909) (2,679) (744) Amortization of deferred revenues (See note 12) (901) (398) — Normally recurring capital expenditures and leasing costs (See note 13)(1,485) (1,026) (617) AFFO$20,329 $11,964 $4,609 Common Stock dividends and distributions to Unitholders declared: Common Stock dividends $10,840 $9,576 $5,741 Distributions to Unitholders (See note 2) 228 221 195 Total $11,068 $9,797 $5,936 Common Stock dividends and Unitholder distributions per share $0.26 $0.25 $0.22 FFO per weighted average basic share of Common Stock and Unit outstanding$0.38 $0.31 $0.24AFFO per weighted average basic share of Common Stock and Unit outstanding$0.48 $0.31 $0.18 Weighted average shares of Common Stock and Units outstanding: (A) Basic: Common Stock 41,320 37,205 25,210 Class A Units 954 895 886 Common Stock and Class A Units 42,274 38,100 26,096 Diluted Common Stock and Class A Units (B) 43,000 43,355 27,009 Actual shares of Common Stock outstanding, including 12, 12 and 15 unvestedshares of restricted Common Stock at December 31, 2018, 2017 and 2016, respectively41,788 38,577 26,514Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Actual Class A Units outstanding at December 31, 2018, 2017 and 2016,respectively.877 885 886 Total 42,665 39,462 27,400 (A) Units and Unitholders refer to Class A Units in our Operating Partnership (as defined in note 2), or Class A Units, and holders of Class AUnits, respectively. Unitholders include recipients of awards of Class B Units in our Operating Partnership, or Class B Units, for annual servicewhich became vested and earned and automatically converted to Class A Units. Unitholders also include the entity that contributed the WadeGreen grocery-anchored shopping center. The Class A Units collectively represent an approximate 2.26% weighted average non-controllinginterest in the Operating Partnership for the three-month period ended December 31, 2018.(B) Since our FFO and AFFO results are positive for the periods reflected above, we are presenting recalculated diluted weighted average sharesof Common Stock and Class A Units for these periods for purposes of this table, which includes the dilutive effect of common stock equivalentsfrom grants of the Class B Units, warrants included in units of Series A Preferred Stock issued, as well as annual grants of restricted CommonStock. The weighted average shares of Common Stock outstanding presented on the Consolidated Statements of Operations are the same forbasic and diluted for any period for which we recorded a net loss available to common stockholders, excluding any gains from sales of real estateassets.See Notes to Reconciliation of FFO, Core FFO and AFFO to Net Income (Loss) Attributable to Common stockholders.66Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Reconciliation of FFO Attributable to Common Stockholders and Unitholders and AFFOto Net (Loss) Income Attributable to Common Stockholders (A) Years ended December 31,(In thousands, except per-share figures) 2018 2017 2016 Net loss attributable to common stockholders (See note 1)$(43,290) $(35,985) $(50,630) Add:Depreciation of real estate assets 124,499 85,285 55,896 Amortization of acquired real estate intangible assets and deferred leasing costs45,136 30,693 21,701 Net income (loss) attributable to non-controlling interests (See note 2) 1,071 986 (310)Less:Gain on sale of real estate (69,643) (37,635) (4,271)FFO attributable to common stockholders and unitholders57,773 43,344 22,386 Add:Acquisition and pursuit costs — 14 8,548 Loan cost amortization on acquisition term notes 83 128 167 Amortization of loan coordination fees paid to the Manager (See note 3)2,487 1,599 870 Mortgage loan refinancing and extinguishment costs288 1,742 — Costs incurred from extension of management agreement with advisor— — 421 (Insurance recovery in excess of) weather-related property operating losses (See note 4)(270) 898 — Contingent management feesrecognized 206 387 — Non-cash equity compensation to directors and executives1,703 3,470 2,524 Amortization of loan closing costs (See note 5) 4,801 3,550 2,559 Depreciation/amortization of non-real estate assets 1,501 799 543 Net loan fees received (See note 6) 2,166 1,314 1,872 Accrued interest income received (See note 7) 20,676 11,813 6,876 Loan loss allowance (See note 8) 2,533 — — Non-cash dividends on Preferred Stock 755 63 — Amortization of lease inducements (See note 9) 1,381 437 —Less:Non-cash loan interest income (See note 7) (19,337) (18,064) (14,686) Cash paid for loan closing costs (1,489) (28) (229) Amortization of purchase option termination revenues in excess of cash received (See note 10)(920) — — Non-cash revenues from mortgage-backed securities(320) — — Amortization of acquired above and below market lease intangibles and straight-line rental revenues (See note 11)(11,956) (8,176) (2,458) Amortization of deferred revenues (See note 12) (2,666) (855) — Normally recurring capital expenditures and leasing costs (See note 13)(4,966) (4,058) (2,798)AFFO$54,429 $38,377 $26,595 Common Stock dividends and distributions to Unitholders declared: Common Stock dividends 41,129 31,244 19,941 Distributions to Unitholders (See note 2) 1,041 844 671 Total 42,170 32,088 20,612Common Stock dividends and Unitholder distributions per share $1.02 $0.94 $0.8175 FFO per weighted average basic share of Common Stock and Unit outstanding$1.41 $1.32 $0.90AFFO per weighted average basic share of Common Stock and Unit outstanding$1.33 $1.17 $1.07 Weighted average shares of Common Stock and Units outstanding: (A) Basic: Common Stock 40,032 31,927 23,970 Class A Units 1,040 906 819 Common Stock and Class A Units 41,072 32,833 24,789 Diluted Common Stock and Class A Units (B) 42,390 36,939 26,502 Actual shares of Common Stock outstanding, including 12, 12 and 15 unvested shares of restricted Common Stock at December 31, 2018, 2017 and 2016, respectively41,788 38,577 26,514Actual Class A Units outstanding at December 31, 2018, 2017 and 2016, respectively.877 885 886Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Total 42,665 39,462 27,400 (A) Units and Unitholders refer to Class A Units in our Operating Partnership (as defined in note 2), or Class A Units, and holders of Class A Units,respectively. Unitholders include recipients of awards of Class B Units in our Operating Partnership, or Class B Units, for annual service whichbecame vested and earned and automatically converted to Class A Units. Unitholders also include the entity that contributed the Wade Greengrocery-anchored shopping center. The Class A Units collectively represent an approximate 2.53% weighted average non-controlling interest inthe Operating Partnership for the twelve-month period ended December 31, 2018.(B) Since our FFO and AFFO results are positive for the periods reflected above, we are presenting recalculated diluted weighted average shares ofCommon Stock and Class A Units for these periods for purposes of this table, which includes the dilutive effect of common stock equivalents fromgrants of the Class B Units, warrants included in units of Series A Preferred Stock issued, as well as annual grants of restricted Common Stock. Theweighted average shares of Common Stock outstanding presented on the Consolidated Statements of Operations are the same for basic and dilutedfor any period for which we recorded a net loss available to common stockholders, excluding any gains from sales of real estate assets.See Notes to Reconciliation of FFO and AFFO to Net Income (Loss) Attributable to Common Stockholders.67Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Notes to Reconciliations of FFO Attributable to Common Stockholders and Unitholders and AFFO to Net Income (Loss) Attributable to CommonStockholders1)Rental and other property revenues and property operating expenses for the quarter ended December 31, 2018 include activity for the properties acquired during thequarter only from their respective dates of acquisition and the activity for the properties sold during the period only through the date of the sale. In addition, the fourthquarter 2018 period includes activity for the properties acquired since December 31, 2017. Rental and other property revenues and expenses for the fourth quarter 2017include activity for the acquisitions made during that period only from their respective dates of acquisition.2)Non-controlling interests in Preferred Apartment Communities Operating Partnership, L.P., or our Operating Partnership, consisted of a total of 877,454 Class A Unitsas of December 31, 2018. Included in this total are 419,228 Class A Units which were granted as partial consideration to the seller in conjunction with the seller'scontribution 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 executiveofficers. The Class A Units are apportioned a percentage of our financial results as non-controlling interests. The weighted average ownership percentage of these holdersof Class A Units was calculated to be 2.26% and 2.35% for the three-month periods ended December 31, 2018 and 2017, respectively and 2.53% and 2.76% for theyears ended December 31, 2018 and 2017, respectively.3)As of January 1, 2016, we pay loan coordination fees to Preferred Apartment Advisors, LLC, our Manager, related to obtaining mortgage financing for acquiredproperties. Loan coordination fees were introduced to reflect the administrative effort involved in arranging debt financing for acquired properties. The portion of the loancoordination fees paid up until July 1, 2017 attributable to the financing were amortized over the lives of the respective mortgage loans, and this non-cash amortizationexpense is an addition to FFO in the calculation of AFFO. Beginning effective July 1, 2017, the loan coordination fee was lowered from 1.6% to 0.6% of the amount ofany mortgage indebtedness on newly-acquired properties or refinancing. All of the loan coordination fees paid to our Manager subsequent to July 1, 2017 are amortizedover the life of the debt. At December 31, 2018, aggregate unamortized loan coordination fees were approximately $13.6 million, which will be amortized over a weightedaverage remaining loan life of approximately 10.8 years.4)We sustained weather related operating losses due to hurricanes (primarily due to Hurricane Harvey at our Stone Creek multifamily community) during the year endedDecember 31, 2018; these costs are added back to FFO in our calculation of AFFO. Lost rent and other operating costs incurred during the year ended December 31,2018 totaled approximately $563,000. This number is offset by the receipt from our insurance carrier of approximately $833,000 for recoveries of lost rent, which wasrecognized in our consolidated statements of operations for the year ended December 31, 2018.5)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 foroccasional amendments to our syndicated revolving line of credit with Key Bank National Association, or our Revolving Line of Credit. Effective April 13, 2018, themaximum borrowing capacity on the Revolving Line of Credit was increased from $150 million to $200 million. These loan closing costs are also amortized over the livesof 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 theOperating Partnership have any recourse liability in connection with any of the mortgage loans, nor do we have any cross-collateralization arrangements with respect tothe 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 ourRevolving Line of Credit, which provides for full recourse liability. At December 31, 2018, aggregate unamortized loan costs were approximately $23.4 million, whichwill be amortized over a weighted average remaining loan life of approximately 9.1 years.6)We receive loan origination fees in conjunction with the origination of certain real estate loan investments. These fees are then recognized as revenue over the lives of theapplicable loans as adjustments of yield using the effective interest method. The total fees received after the payment of loan origination fees to our Manager are additiveadjustments in the calculation of AFFO. Correspondingly, the amortized non-cash income is a deduction in the calculation of AFFO. Over the lives of certain loans, weaccrue additional interest amounts that become due to us at the time of repayment of the loan or refinancing of the property, or when the property is sold. This non-cashinterest income is subtracted from FFO in our calculation of AFFO. The amount of additional accrued interest becomes an additive adjustment to FFO once received fromthe borrower (see note 7).7)This adjustment reflects the receipt during the periods presented of additional interest income (described in note 6 above) which was earned and accrued prior to thoseperiods presented on various real estate loans.8)During the year ended December 31, 2018, we recorded a $2.5 million loss on our real estate loan investment to the developer of Fusion Apartments in Irvine, Californiawhich is reflected on our statements of operations. This loss was reduced from the previously reported $3.0 million for the nine months ended September 30, 2018because of the application of accounting guidance pertaining to troubled debt restructuring, which requires any cash received to be applied as a reduction in the principalbalance of the loan, not as interest revenue. The Company received interest payments during the fourth quarter of 2018, which reduced the allowance for loan loss on ourconsolidated balance sheet as well as the bad debt charge presented on our consolidated statements of operations.9)This adjustment removes the non-cash amortization of costs incurred to induce tenants to lease space in our office buildings and grocery-anchored shopping centers.68Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.10)On May 7, 2018, we terminated our existing purchase options on the Encore, Bishop Street and Hidden River multifamily communities and the Haven 46 and HavenCharlotte student housing properties, all of which are partially supported by real estate loan investments held by us. In exchange, we are to receive termination feesaggregating approximately $10.7 million from the developers, which are recorded as revenue over the period beginning on the date of election until the earlier of (i) thematurity of the real estate loan investment and (ii) the sale of the property. The receipt of the cash termination fees is an additive adjustment in our calculation of AFFOand the removal of non-cash revenue from the recognition of the termination fees is a reduction to FFO in our calculation of AFFO; both of these adjustments arepresented in a single net number within this line. As of December 31, 2018, we had recognized termination fee revenues in excess of the cash received by approximately$920,000. This difference is a reduction to FFO in our calculation of AFFO.11)This adjustment reflects straight-line rent adjustments and the reversal of the non-cash amortization of below-market and above-market lease intangibles, which wererecognized in conjunction with our acquisitions and which are amortized over the estimated average remaining lease terms from the acquisition date for multifamilycommunities and over the remaining lease terms for grocery-anchored shopping center assets and office buildings. At December 31, 2018, the balance of unamortizedbelow-market lease intangibles was approximately $47.1 million, which will be recognized over a weighted average remaining lease period of approximately 9.2 years.12)This adjustment removes the non-cash amortization of deferred revenue recorded by us in conjunction with Company-owned lessee-funded tenant improvements in ouroffice buildings, as well as non-cash revenue earned from our investment in the collateralized mortgage-backed security in the ML-04 pool from the Freddie Mac Kprogram. 13)We deduct from FFO normally recurring capital expenditures that are necessary to maintain our assets’ revenue streams in the calculation of AFFO. This adjustment alsodeducts from FFO capitalized amounts for third party costs during the period to originate or renew leases in our grocery-anchored shopping centers and office buildings.No adjustment is made in the calculation of AFFO for nonrecurring capital expenditures.Liquidity and Capital ResourcesShort-Term LiquidityWe believe our principal short-term liquidity needs are to fund:•operating expenses directly related to our portfolio of multifamily communities, student housing properties, grocery-anchored shopping centersand office properties (including regular maintenance items);•capital expenditures incurred to lease our multifamily communities, student housing properties, grocery-anchored shopping centers and officeproperties;•interest expense on our outstanding property level debt;•amounts due on our Credit Facility;•distributions that we pay to our preferred stockholders, common stockholders, and unitholders;•cash redemptions that we may pay to our preferred stockholders, and•committed investments.We have a credit facility, or Credit Facility, with KeyBank National Association, or KeyBank, which defines a revolving line of credit, or RevolvingLine of Credit, which is used to fund investments, capital expenditures, dividends (with consent of KeyBank), working capital and other general corporatepurposes on an as needed basis. On March 23, 2018, the maximum borrowing capacity on the Revolving Line of Credit was increased to $200 millionpursuant to an accordion feature. The accordion feature permits the maximum borrowing capacity to be expanded or contracted without amending any furtherterms of the instrument. On December 12, 2018, the Fourth Amended and Restated Credit Agreement, or the Amended and Restated Credit Agreement, wasamended to extend the maturity to December 12, 2021, with an option to extend the maturity date to December 12, 2022, subject to certain conditionsdescribed therein. The Revolving Line of Credit accrues interest at a variable rate of one month LIBOR plus an applicable margin of 2.75% to 3.50% perannum, depending upon our leverage ratio. The weighted average interest rate for the Revolving Line of Credit was 5.23% for the year ended December 31,2018. The Amended and Restated Credit Agreement also reduced the commitment fee on the average daily unused portion of the Revolving Line of Credit to0.25% or 0.30% per annum, depending upon our outstanding Credit Facility balance.On December 17, 2018, we refinanced the mortgage on its Baldwin Park multifamily community. The mortgage principal balance decreased fromapproximately $77.8 million to approximately $71.5 million under the new financing arrangement, and the existing variable interest rate was replaced with afixed rate of 4.16% per annum. The new mortgage instrument matures on January 1, 2054. As a result of the refinance, we incurred expenses of approximately$130,000, which are included within the Interest Expense line of the Consolidated Statements of Operations.69Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.On March 29, 2018, we refinanced the mortgage on its Sol student housing property. A short-term bridge loan was used to replace the mortgagebeing held on the Acquisition Facility. The mortgage principal balance of approximately $37.5 million remained the same under the new financingarrangement, and the existing variable interest rate increased 10 basis points, to 210 basis points over LIBOR. As a result of the refinance, we incurredexpenses of approximately $61,000, which are included within the Interest Expense line of the Consolidated Statements of Operations.On October 31, 2018, we refinanced the mortgage on its Sol student housing property out of the short-term bridge loan. The mortgage principalbalance was reduced from approximately $37.5 million to approximately $36.2 million, and the existing variable interest rate of 210 basis points overLIBOR was converted to a fixed rate of 4.71%. As a result of the refinance, we incurred expenses of approximately $97,000, which are included within theInterest Expense line of the Consolidated Statements of Operations.On May 26, 2016, we utilized proceeds from the Interim Term Loan to partially finance the acquisition of Anderson Central, a grocery-anchoredshopping center located in Anderson, South Carolina. The Interim Term Loan accrued interest at a rate of LIBOR plus 2.5% per annum and was repaid andextinguished during the first quarter 2018.The Amended and Restated Credit Agreement contains certain affirmative and negative covenants including negative covenants that limit or restrictsecured and unsecured indebtedness, mergers and fundamental changes, investments and acquisitions, liens and encumbrances, dividends, transactions withaffiliates, burdensome agreements, changes in fiscal year and other matters customarily restricted in such agreements. The material financial covenantsinclude minimum net worth and debt service coverage ratios and maximum leverage and dividend payout ratios. As of December 31, 2018, we were incompliance with all covenants related to the Fourth Amended and Restated Credit Agreement. Our results with respect to such compliance are presented inNote 10 to the Company's Consolidated Financial Statements.On February 28, 2017, we entered into a revolving acquisition credit agreement, or Acquisition Credit Agreement, with KeyBank to obtain anacquisition revolving credit facility, or Acquisition Facility, with a maximum borrowing capacity of $200 million. The sole purpose of the Acquisition CreditAgreement is to finance our acquisitions of multifamily communities and student housing communities prior to obtaining permanent conventional mortgagefinancing on the acquired assets. The maximum borrowing capacity on the Acquisition Facility may be increased at our request up to $300 million at anytime prior to March 1, 2021. The Acquisition Facility accrues interest at a variable rate of one month LIBOR plus a margin of between 1.75% per annum and2.20% per annum, depending on the type of assets acquired and the resulting property debt service coverage ratio. The Acquisition Facility has a maturitydate of March 1, 2022 and has two one-year extension options, subject to certain conditions described therein.Our net cash provided by operating activities for the years ended December 31, 2018, 2017 and 2016 was approximately $145.4 million, $86.3million, and $61.7 million, respectively. The increases in net cash provided by operating activities was primarily due to the incremental cash generated byproperty income provided by the real estate assets acquired during 2018 and 2017.The majority of our revenue is derived from residents and tenants under existing leases at our multifamily communities, student housing properties,grocery-anchored shopping centers and office properties. Therefore, our operating cash flow is principally dependent on: (1) the number of multifamilycommunities, student housing properties, grocery-anchored shopping centers and office properties in our portfolio; (2) rental rates; (3) occupancy rates; (4)operating expenses associated with these properties; and (5) the ability of our residents and tenants to make their rental payments.We also earn interest revenue from the issuance of real estate-related loans and may receive fees at the inception of these loans for committing andoriginating them. Interest revenue we receive on these loans is influenced by (1) market interest rates on similar loans; (2) the availability of credit fromalternative financing sources; (3) the desire of borrowers to finance new real estate projects; and (4) unique characteristics attached to these loans, such asexclusive purchase options.Our net cash used in investing activities was approximately $881.8 million, $727.2 million and $1.1 billion for the years ended December 31, 2018,2017 and 2016, respectively. Disbursements for property acquisitions were approximately $1.0 billion, $779.6 million and $969.4 million for the yearsended December 31, 2018, 2017 and 2016, respectively. Net proceeds from our sale of McNeil Ranch and Stoneridge Farms at the Hunt Club wereapproximately $164.8 million and from our sale of Ashford Park, Sandstone Creek and Enclave at Vista Ridge during 2017 totaled approximately $116.8million. Disbursements for real estate loans and notes receivable, net of repayments, were approximately $52.4 million, $55.7 million and $111.3 million theyears ended70Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.December 31, 2018, 2017 and 2016, respectively. For the year ended December 31, 2018, we collected approximately $52.5 million on real estate loans andnotes receivable, net of investments.Cash used in investing activities is primarily driven by acquisitions and dispositions of multifamily properties, student housing properties, officeproperties and grocery-anchored shopping centers and acquisitions and maturities or other dispositions of real estate loans and other real estate and realestate-related assets, and secondarily by capital expenditures related to our owned properties. We will seek to acquire more multifamily communities, studenthousing properties, office properties and grocery-anchored shopping centers at costs that we expect will be accretive to our financial results. Capitalexpenditures may be nonrecurring and discretionary, as part of a strategic plan intended to increase a property’s value and corresponding revenue-generatingpower, or may be normally recurring and necessary to maintain the income streams and present value of a property. Certain capital expenditures may bebudgeted and reserved for upon acquiring a property as initial expenditures necessary to bring a property up to our standards or to add features or amenitiesthat we believe make the property a compelling value to prospective residents or tenants in its individual market. These budgeted nonrecurring capitalexpenditures in connection with an acquisition are funded from the capital source(s) for the acquisition and are not dependent upon subsequent propertyoperational cash flows for funding.For the year ended December 31, 2018, our capital expenditures for our multifamily communities, not including changes in related payables were asfollows: Capital Expenditures Recurring Non-recurring Total(in thousands, except per-unitamounts)Amount Per Unit Amount Per Unit Amount Per UnitAppliances $400 $41.99 $— $— $400 $41.99Carpets1,339 140.41 — — 1,339 140.41Wood flooring / vinyl394 41.37 — — 394 41.37Blinds and ceiling fans139 14.57 — — 139 14.57Fire safety13 1.37 198 20.74 211 22.11Furnace, air (HVAC)370 38.86 — — 370 38.86Computers, equipment, misc.29 3.01 244 25.62 273 28.63Elevators— — 17 1.78 17 1.78Exterior painting— — 293 30.80 293 30.80Leasing office / common amenities123 12.94 2,350 246.49 2,473 259.43Major structural— — 6,746 707.62 6,746 707.62Cabinets & countertop upgrades— — 1,415 148.40 1,415 148.40Landscaping & fencing5 0.47 578 60.64 583 61.11Parking lot76 7.95 636 66.69 712 74.64Signage and sanitation— — 197 20.63 197 20.63 $2,888 $302.94 $12,674 $1,329.41 $15,562 $1,632.3571Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.For the year ended December 31, 2018, our capital expenditures for our student housing properties, not including changes in related payables wereas follows: Capital Expenditures Recurring Non-recurring Total(in thousands, except per-unitamounts)Amount Per Bed Amount Per Bed Amount Per BedAppliances $63 $14.77 $— $— $63 $14.77Carpets81 18.87 — — 81 18.87Wood flooring / vinyl9 1.99 — — 9 1.99Blinds and ceiling fans16 3.77 — — 16 3.77Fire safety— — 64 15.00 64 15.00Furnace, air (HVAC)81 18.90 — — 81 18.90Computers, equipment, misc.16 3.79 102 24.01 118 27.80Elevators— — — — — —Exterior painting— — 11 2.49 11 2.49Leasing office / common amenities86 20.15 263 61.36 349 81.51Major structural1 0.34 167 38.97 168 39.31Cabinets & countertop upgrades8 1.70 227 53.21 235 54.91Landscaping & fencing— — 61 14.16 61 14.16Parking lot— — 11 2.46 11 2.46Signage and sanitation2 0.54 54 12.70 56 13.24 $363 $84.82 $960 $224.36 $1,323 $309.18 For the year ended December 31, 2017, our capital expenditures for our multifamily communities, not including changes in related payables were asfollows: Capital Expenditures Recurring Non-recurring Total(in thousands, except per-unitamounts)Amount Per Unit Amount Per Unit Amount Per UnitAppliances $324 $32.59 $— $— $324 $32.59Carpets1,297 130.47 — — 1,297 130.47Wood flooring / vinyl231 23.25 — — 231 23.25Fire safety— — 100 10.08 100 10.08Furnace, air (HVAC)291 29.24 — — 291 29.24Computers, equipment, misc.72 7.23 239 24.05 311 31.28Elevators— — 19 1.92 19 1.92Exterior painting— — 539 54.16 539 54.16Leasing office / common amenities173 17.39 809 81.36 982 98.75Major structural — — 3,191 320.85 3,191 320.85Cabinets & countertop upgrades— — 1,880 189.07 1,880 189.07Landscaping & fencing— — 577 58.05 577 58.05Parking lot— — 133 13.34 133 13.34Signage and sanitation— — 194 19.45 194 19.45 $2,388 $240.17 $7,681 $772.33 $10,069 $1,012.5072Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.For the year ended December 31, 2017, our capital expenditures for our student housing properties, not including changes in related payables wereas follows: Capital Expenditures Recurring Non-recurring Total(in thousands, except per-unitamounts)Amount Per Bed Amount Per Bed Amount Per BedAppliances $18 $13.17 $— — 18 13.17Carpets34 24.25 — — 34 24.25Wood flooring / vinyl13 9.17 — — 13 9.17Fire safety— — — — — —Furnace, air (HVAC)3 2.27 — — 3 2.27Computers, equipment, misc.9 6.23 19 13.46 28 19.69Elevators— — 12 8.74 12 8.74Exterior painting— — — — — —Leasing office / common amenities45 32.53 209 151.15 254 183.68Major structural— — 176 126.65 176 126.65Cabinets & countertop upgrades— — 3 2.35 3 2.35Landscaping & fencing— — 109 78.88 109 78.88Parking lot— — — — — —Signage and sanitation— — 1 0.72 1 0.72 $122 $87.62 $529 $381.95 $651 $469.57In addition, second-generation capital expenditures within our grocery-anchored shopping center portfolio for the years ended December 31, 2018,2017 and 2016 totaled $1,562,831, $1,280,444 and $581,028, respectively. We define second-generation capital expenditures as those that excludeexpenditures made in our grocery-anchored shopping center portfolio (i) to lease space to "first generation" tenants (i.e. leasing capital for existing vacanciesand known move-outs at the time of acquisition), (ii) to bring recently acquired properties up to our ownership standards, and (iii) for property re-developments and repositioning.Second-generation capital expenditures within our office properties portfolio for the years ended December 31, 2018, 2017 and 2016 totaled$152,356 and $267,549, and $0 respectively. Second-generation capital expenditures exclude those expenditures made in our office properties portfolio (i)to lease space to "first generation" tenants (i.e. leasing capital for existing vacancies and known move-outs at the time of acquisition), (ii) to bringrecently acquired properties up to our Class A ownership standards (and which amounts were underwritten into the total investment at the time of acquisition)and (iii) for property re-developments and repositionings.At December 31, 2018, we had restricted cash of approximately $14.7 million that was contractually restricted to fund capital expenditures and otherproperty-level commitments such as tenant improvements and leasing commissions.Net cash provided by financing activities was approximately $751.1 million, $646.2 million and $1.1 billion for the years ended December 31,2018, 2017 and 2016, respectively. Our significant financing cash sources were approximately $602.4 million, $517.5 million and $622.4 million of netproceeds from the mortgage financing transactions for the years ended December 31, 2018, 2017 and 2016, respectively and approximately $408.6 million,$306.9 million and $394.6 million of net proceeds from our offerings of our Preferred Stock Units for the years ended December 31, 2018, 2017 and 2016,respectively.DistributionsIn order to maintain our status as a REIT for U.S. federal income tax purposes, we must comply with a number of organizational and operatingrequirements, including a requirement to distribute 90% of our annual REIT taxable income (which does not equal net income as calculated in accordancewith GAAP and determined without regard for the deduction for dividends paid and excluding net capital gains) to our stockholders. As a REIT, we generallywill not be subject to federal income taxes on the taxable income we distribute to our stockholders. Generally, our objective is to meet our short-termliquidity requirement of funding the payment of our quarterly Common Stock dividends, as well as monthly dividends to holders of our Series A RedeemablePreferred Stock and our mShares, through net cash generated from operating results.Our board of directors reviews the Series A Redeemable Preferred Stock and our mShares dividends monthly to determine whether we have fundslegally available for payment of such dividends in cash, and there can be no assurance that the Series A Redeemable Preferred Stock and our mSharesdividends will consistently be paid in cash. Dividends may be paid as a combination73Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.of cash and stock in order to satisfy the annual distribution requirements applicable to REITs. We expect the aggregate dollar amount of monthly Series ARedeemable Preferred Stock and our mShares dividend payments to increase at a rate that approximates the rate at which we issue new Units from our $1.5Billion Unit Offering and mShares from our mShares Offering, less those shares redeemed.Our fourth quarter 2018 Common Stock dividend declaration of $0.26 per share represented an overall increase of 108% from our initial CommonStock dividend per share of $0.125 following our IPO, or an average annual dividend growth rate of approximately 14.4% over the same period. Our board ofdirectors reviews the proposed Common Stock dividend declarations quarterly, and there can be no assurance that the current dividend level will bemaintained.We believe that our short-term liquidity needs are and will continue to be adequately funded.For the year ended December 31, 2018, our aggregate dividends and distributions totaled approximately $128.9 million and our cash flows fromoperating activities were approximately $145.4 million. We expect our cash flow from operations over time to be sufficient to fund our quarterly CommonStock dividends, Class A Unit distributions and our monthly Series A Redeemable Preferred Stock and mShares dividends.Long-Term Liquidity NeedsWe believe our principal long-term liquidity needs are to fund:•the principal amount of our long-term debt as it becomes due or matures;•capital expenditures needed for our multifamily communities, student housing properties, grocery-anchored shopping centers and officeproperties;•costs associated with current and future capital raising activities;•costs to acquire additional multifamily communities, student housing properties, grocery-anchored shopping centers, office properties or otherreal estate and enter into new and fund existing lending opportunities; and•our minimum distributions necessary to maintain our REIT status.We intend to finance our future investments with the net proceeds from additional issuances of our securities, including our $1.5 Billion UnitOffering, our mShares Offering (both as defined below), Common Stock, and units of limited partnership interest in our Operating Partnership, and/orborrowings. The success of our acquisition strategy may depend, in part, on our ability to access further capital through issuances of additional securities,especially our $1.5 Billion Unit Offering, details of which are described below. If we are unsuccessful in raising additional funds, we may not be able toobtain any assets in addition to those we have acquired.On October 11, 2013, the SEC declared effective our registration statement on Form S-3 (File No. 333-183355) for our offering of up to 900,000Units, with each Unit consisting of one share of our Series A Redeemable Preferred Stock, stated value $1,000 per share and one Warrant to purchase 20shares of our Common Stock, to be offered from time to time on a “reasonable best efforts” basis. This offering is referred to as the Follow-On Series AOffering. We commenced sales for the Follow-On Series A Offering on January 1, 2014. As of February 14, 2017, we had issued all 900,000 Units from andterminated our Follow-On Series A Offering.On February 14, 2017, the SEC declared effective our registration statement on Form S-3 (Registration No. 333-211924) for our offering for up to1,500,000 Units, with each Unit consisting of one share of Series A Redeemable Preferred Stock and one Warrant to purchase up to 20 shares of CommonStock, referred to as our $1.5 Billion Unit Offering. The price per Unit is $1,000, subject to adjustment if a participating broker-dealer reduces its commission.We intend to invest substantially all the net proceeds of the $1.5 Billion Unit Offering in connection with the acquisition of multifamily communities,student housing communities, grocery-anchored shopping centers, office buildings and other real estate-related investments and general working capitalpurposes.Aggregate offering expenses, including selling commissions and dealer manager fees, will be capped at 11.5% of the aggregate gross proceeds of the$1.5 Billion Unit Offering, of which we will reimburse our Manager up to 1.5% of the gross proceeds of these offerings for all organization and offeringexpenses incurred, excluding selling commissions and dealer manager fees; however, upon approval by the conflicts committee of our board of directors, wemay reimburse our Manager for any such expenses incurred above the 1.5% amount as permitted by the Financial Industry Regulatory Authority.74Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.On December 2, 2016, the SEC declared effective our registration statement on Form S-3 (Registration No. 333-214531), for our offering of up to500,000 shares of Series M Redeemable Preferred Stock, or mShares, par value $0.01 per share, or the mShares Offering. The price per mShare is $1,000. Weintend to invest substantially all the net proceeds of the mShares Offering in connection with the acquisition of multifamily communities, student housingcommunities, grocery-anchored shopping centers, office buildings and other real estate-related investments and general working capital purposes. Pursuant to FINRA Rule 2310(b)(5), which became effective April 11, 2016, and as described in Regulatory Notice 15-02, we have prepared for ourstockholders an estimate of the per share value of our Preferred Stock as of December 31, 2018. This estimate is based on dividing (i) the value of our assetsless contractual liabilities as of December 31, 2018, by (ii) the number of shares of Preferred Stock outstanding as of that date. We used a direct capitalizationappraised value analysis for this purpose. This methodology was prepared with the material assistance and confirmation of a third party valuation expertpursuant to FINRA Rule 2310(b)(5) and NASD Rule 2340(c). We believe this methodology conforms to standard industry practices. Based on the foregoing,we have determined that the estimated value as of December 31, 2018 of our Preferred Stock is $1,000 per share (unaudited).Under the direct capitalization appraised value analysis, we determined our potential gross income that could be expected from rents and otherincome received from the properties that we owned as of December 31, 2018. We then estimated for vacancies and collection losses, which amount we thensubtracted from potential gross income to arrive at effective gross income. We subtracted estimated operating expenses from effective gross income to arriveat net operating income, and current market capitalization rates were determined for each of the properties. The capitalization rate of each property was thendivided by its net operating income to determine a fair market value for each property. For any property owned for less than 12 months, we used the marketvalue of that property as reflected in the third party appraisal we had received at the time of acquisition of that property. The fair market value of all theproperties was then added to the value of our other assets (i.e., the value of our cash on hand and other financial assets as reflected on our auditedconsolidated financial statements for the year ended December 31, 2018) to determine the aggregate market value of our assets. We then subtracted ourcontractual liabilities from the aggregate market value of our assets, and divided the difference by the number of shares of our Preferred Stock outstanding asof December 31, 2018 to determine our estimated per share value of our Preferred Stock as of that date. On May 12, 2017, we sold 2,750,000 shares of our Common Stock at a public offering price of $15.25 per share pursuant to an underwritten publicoffering. On May 30, 2017, we sold an additional 412,500 shares of Common Stock at $15.25 per share pursuant to the exercise in full of an option receivedin connection with the public offering. The combined gross proceeds of the two sales was approximately $48.2 million before deducting underwritingdiscounts and commissions and other estimated offering expenses.We have filed a prospectus to issue and sell up to $150 million of Common Stock from time to time in an "at the market" offering, or the 2016 ATMOffering, through the sales agents identified in the prospectus. We intend to use any proceeds from the 2016 ATM Offering (a) to repay outstanding amountsunder our Revolving Line of Credit and (b) for other general corporate purposes, which includes making investments in accordance with our investmentobjectives. For the year ended December 31, 2017, we issued and sold approximately 1.7 million shares of our Common Stock for gross proceeds ofapproximately $28.6 million via our 2016 ATM Offering. No sales of Common Stock under the 2016 ATM offering occurred during the year endedDecember 31, 2018.For the year ended December 31, 2018, we issued approximately 1.25 million shares of our Common Stock pursuant to exercises of warrants fromour Series A offerings and collected gross proceeds of approximately $16.1 million.Our ability to raise funds through the issuance of our securities is dependent on, among other things, general market conditions for REITs, marketperceptions 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 atany particular point in time, but the equity and credit markets may not consistently be available on terms that are attractive to us or at all.The sources to fulfill our long-term liquidity in the future may include borrowings from a number of sources, including repurchase agreements,securitizations, resecuritizations, warehouse facilities and credit facilities (including term loans and revolving facilities), in addition to our Revolving Line ofCredit. 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 tomake more investments than would otherwise be possible, resulting in a larger and more diversified portfolio.75Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.We intend to target leverage levels (secured and unsecured) between 50% and 65% of the fair market value of our tangible assets (including our realestate assets, real estate loans, notes receivable, accounts receivable and cash and cash equivalents) on a portfolio basis. As of December 31, 2018, ouroutstanding debt (both secured and unsecured) was approximately 52.4% of the value of our tangible assets on a portfolio basis based on our estimates of fairmarket value at December 31, 2018. Neither our charter nor our by-laws contain any limitation on the amount of leverage we may use. Our investmentguidelines, which can be amended by our board without stockholder approval, limit our borrowings (secured and unsecured) to 75% of the cost of ourtangible assets at the time of any new borrowing. These targets, however, will not apply to individual real estate assets or investments. The amount ofleverage we will place on particular investments will depend on our Manager's assessment of a variety of factors which may include the anticipated liquidityand price volatility of the assets in our investment portfolio, the potential for losses and extension risk in the portfolio, the availability and cost of financingthe asset, our opinion of the creditworthiness of our financing counterparties, the health of the U.S. economy and the health of the commercial real estatemarket in general. In addition, factors such as our outlook on interest rates, changes in the yield curve slope, the level and volatility of interest rates and theirassociated credit spreads, the underlying collateral of our assets and our outlook on credit spreads relative to our outlook on interest rate and economicperformance could all impact our decision and strategy for financing the target assets. At the date of acquisition of each asset, we anticipate that theinvestment cost for such asset will be substantially similar to its fair market value. However, subsequent events, including changes in the fair market value ofour assets, could result in our exceeding these limits. Finally, we intend to acquire all our real estate assets through separate single purpose entities and weintend to finance each of these assets using debt financing techniques for that asset alone without any cross-collateralization to our other real estate assets orany guarantees by us or our Operating Partnership. We intend to have no long-term unsecured debt at the Company or Operating Partnership levels, exceptfor 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 ourboard of directors at least quarterly. In determining whether our borrowings are reasonable in relation to our tangible assets, we expect that our board ofdirectors will consider many factors, including without limitation the lending standards of government-sponsored enterprises, such as Fannie Mae andFreddie Mac, for loans in connection with the financing of multifamily properties, the leverage ratios of publicly traded and non-traded REITs with similarinvestment 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 ofleverage and borrowing restrictions imposed by lenders. We will continue to monitor the debt markets, including Fannie Mae and/or Freddie Mac (from bothof whom we have obtained single asset secured financing on all of our multifamily communities), and as market conditions permit, access borrowings that areadvantageous to us.If we are unable to obtain financing on favorable terms or at all, we may have to curtail our investment activities, including acquisitions andimprovements to real properties, which could limit our growth prospects. This, in turn, could reduce cash available for distribution to our stockholders andmay 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 inorder to maintain our REIT qualification and Investment Company Act exemption. Our ability to generate cash from asset sales is limited by marketconditions 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 aswe 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 thatfinanced indebtedness would be higher. Higher interest rates on newly incurred debt may negatively impact us as well. If interest rates increase, our interestcosts and overall costs of capital will increase, which could adversely affect our transaction and development activity, financial condition, results ofoperations, 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 lessinclined to offer to sell to us if they believe we may be unable to obtain financing.As of December 31, 2018, we had long term mortgage indebtedness of approximately $2.3 billion, all of which was incurred by us in connectionwith the acquisition or refinancing of our real estate properties.As of December 31, 2018, we had approximately $39.0 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.76Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Off-Balance Sheet ArrangementsAs of December 31, 2018, we had 1,160,263 outstanding Warrants from our sales of Units. The Warrants are exercisable by the holder at an exerciseprice 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 $19.50per share for Warrants issued after February 15, 2017. The current market price per share is determined using the closing market price of the Common Stockimmediately preceding the issuance of the Warrant. The Warrants are not exercisable until one year following the date of issuance and expire four yearsfollowing the date of issuance. As of December 31, 2018, a total of 487,155 Warrants had been exercised into 9,743,100 shares of Common stock. The1,160,263 Warrants outstanding at December 31, 2018 have exercise prices that range between $10.87 and $26.34 per share. If all the Warrants outstanding atDecember 31, 2018 became exercisable and were exercised, gross proceeds to us would be approximately $433.1 million and we would as a result issue anadditional 23,205,260 shares of Common Stock.Contractual ObligationsAs of December 31, 2018, our contractual obligations consisted of the mortgage notes secured by our acquired properties and the Revolving CreditFacility. Based on a LIBOR rate of 2.52% at December 31, 2018, our estimated future required payments on these instruments were:(in thousands) Total Less than oneyear 1-3 years 3-5 years More than fiveyearsMortgage debt obligations: Interest $775,213 $94,753 $177,454 $143,970 $359,036Principal 2,339,752 123,945 278,580 406,458 1,530,769Line of Credit: Interest 105 105 — — —Principal 57,000 57,000 — — —Total $3,172,070 $275,803 $456,034 $550,428 $1,889,805In addition, we had unfunded real estate loan balances totaling approximately $164.9 million at December 31, 2018.Item 7A.Quantitative and Qualitative Disclosures About Market RiskOur primary market risk exposure is interest rate risk. All our floating-rate debt is tied to the 30-day LIBOR. As of December 31, 2018, we havevariable rate mortgages on the properties listed in following table. Balance(in thousands) Percentage oftotal mortgageindebtedness LIBORCap All-in CapAvenues at Creekside$39,697 5.0% 6.6%Citi Lakes41,582 4.3% 6.5%The Tradition30,000 3.3% 7.3%The Bloc28,966 3.3% 6.8%Total capped floating-rate debt140,245 6.0% Ursa31,400 n/a n/aRoyal Lakes9,544 n/a n/aCherokee Plaza24,683 n/a n/aChampions Village27,400 n/a n/aTotal uncapped floating-rate debt93,027 4.0% Total floating-rate debt$233,272 10.0% Our Revolving Line of Credit accrued interest at a spread of 3.25% over LIBOR as of December 31, 2018; this combined rate is uncapped. Becauseof 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 nobusiness operations which subject us to trading risk and no recourse liability or market or interest rate exposure to the consolidated VIE liabilities of the ML-04 mortgage-backed pool.We have and will continue to manage interest rate risk as follows:77Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.•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 outstandingborrowings at December 31, 2018, would increase by approximately $2.2 million or decrease by approximately $2.2 million on an annualized basis. AtDecember 31, 2017, our interest costs would increase by approximately $2.89 million or decrease by approximately $2.89 million on an annualized basis.Further discussion concerning our outlook regarding yield spreads and other market risks are provided in the Industry Outlook section of Management'sDiscussion and Analysis of Financial Condition and Results of Operations.Item 8. Financial Statements and Supplementary DataThe following documents are located in Part IV, Item 15 of this Annual Report on Form 10-K: Consolidated Balance Sheets as of December 31, 2018 and 2017 Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2018, 2017 and 2016 Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 Notes to Consolidated Financial Statements Schedule III- Real Estate Investments and Accumulated Depreciation as of December 31, 2018 with reconciliations for theyears ended December 31, 2018, 2017 and 2016 Schedule IV- Mortgage Loans on Real Estate as of December 31, 2018Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A.Controls and ProceduresManagement's Report on Internal Control over Financial ReportingThe Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, defined in Rules13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934 (Exchange Act) as a process designed by, or under the supervision of, the Company’sprincipal executive and principal financial officers, or persons performing similar functions, and effected by the Company's board of directors, management,and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles and includes those policies and procedures that:•Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of theCompany;•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations ofmanagement and/or the board of directors of the Company; and•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets thatcould have a material effect on the financial statements.78Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with policies and procedures may deteriorate.Management of the Company assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. Inmaking this assessment, management used the criteria described in Internal Control - Integrated Framework (2013) set forth by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Based on this assessment, management concluded the Company’s internal control over financialreporting was effective as of December 31, 2018.The effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopersLLP, an independent registered public accounting firm, as stated in its report included in this Annual Report on Form 10-K.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 ChiefFinancial Officer, the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in the Exchange Act Rule13a-15(e)) as of December 31, 2018, the end of the period covered by this report. Based on that evaluation, the Company's Chief Executive Officer and ChiefFinancial Officer have concluded that the Company's disclosure controls and procedures were effective as of the end of such period to provide reasonableassurance 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 theCompany’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding requireddisclosures.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'sinternal control over financial reporting to determine whether any change occurred during the quarter ended December 31, 2018 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 changeduring such period.Item 9B.Other InformationNone.PART IIIItem 10.Directors, Executive Officers and Corporate GovernanceInformation required by this item regarding our directors and officers is incorporated herein by reference to our proxy statement, or our 2019 ProxyStatement, to be filed with the SEC with regard to our 2019 Annual Meeting of Stockholders.Item 11.Executive CompensationInformation required by this item regarding our officers is incorporated herein by reference to our 2019 Proxy Statement to be filed with the SEC.Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersInformation required by this item is incorporated herein by reference to our 2019 Proxy Statement to be filed with the SEC.Item 13.Certain Relationships and Related Transactions and Director IndependenceInformation required by this item regarding our officers and directors is incorporated herein by reference to our 2019 Proxy Statement to be filedwith the SEC.79Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Item 14.Principal Accounting Fees and ServicesInformation required by this item is incorporated herein by reference to our 2019 Proxy Statement to be filed with the SEC.PART IVItem 15.Exhibits and Financial Statement Schedules(1) Financial Statements Report of Independent Registered Public Accounting Firm81Consolidated Balance Sheets as of December 31, 2018 and 201783Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 201684Consolidated Statements of Stockholders' Equity for the years ended December 31, 2018, 2017 and 201685Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 201688Notes to Consolidated Financial Statements90(2) Financial Statement Schedules Schedule III- Real Estate Investments and Accumulated Depreciation as of December 31, 2018 with reconciliationsfor the years ended December 31, 2018, 2017 and 2016133Schedule IV - Mortgage Loans on Real Estate as of December 31, 2018139(3) Exhibits The exhibits listed on the accompanying Index to Exhibits are filed as a part of this report.14280Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Report of Independent Registered Public Accounting FirmTo the Board of Directors and Stockholdersof Preferred Apartment Communities, Inc.:Opinions on the Financial Statements and Internal Control over Financial ReportingWe have audited the accompanying consolidated balance sheets of Preferred Apartment Communities, Inc. and its subsidiaries (the “Company”) as ofDecember 31, 2018 and December 31, 2017, and the related consolidated statements of operations, of stockholders’ equity and cash flows for each of thethree years in the period ended December 31, 2018, including the related notes and financial statement schedules listed in the accompanying index(collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as ofDecember 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO).In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2018 and December 31, 2017, and the results of their operations and their cash flows for each of the three years in the period ended December31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in allmaterial respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - IntegratedFramework (2013) issued by the COSO.Basis for OpinionsThe Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, andfor its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controlover Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internalcontrol over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonableassurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internalcontrol over financial reporting was maintained in all material respects.Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financialstatements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles usedand significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internalcontrol over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performingsuch other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.81Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ PricewaterhouseCoopers LLPAtlanta, GAMarch 1, 2019 We have served as the Company’s auditor since 2010. 82Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Consolidated Balance Sheets (In thousands, except per-share par values) December 31, 2018 December 31, 2017Assets Real estate Land $519,300 $406,794Building and improvements 2,738,085 2,043,853Tenant improvements 128,914 63,425Furniture, fixtures, and equipment 278,151 210,779Construction in progress 8,265 10,491Gross real estate 3,672,715 2,735,342Less: accumulated depreciation (272,042) (172,756)Net real estate 3,400,673 2,562,586Real estate loan investments, net of deferred fee income and allowance for loan loss 282,548 255,345Real estate loan investments to related parties, net 51,663 131,451Total real estate and real estate loan investments, net 3,734,884 2,949,382 Cash and cash equivalents 38,958 21,043Restricted cash 48,732 51,969Notes receivable 14,440 17,318Note receivable and revolving lines of credit due from related parties 32,867 22,739Accrued interest receivable on real estate loans 23,340 26,865Acquired intangible assets, net of amortization of $113,199 and $73,521 135,961 102,743Deferred loan costs on Revolving Line of Credit, net of amortization of $180 and $1,153 1,916 1,385Deferred offering costs 6,468 6,544Tenant lease inducements, net of amortization of $1,833 and $452 20,698 14,425Receivable from sale of mortgage-backed security 41,181 —Tenant receivables (net of allowance of $1,662 and $715) and other assets 41,567 37,957Variable Interest Entity ("VIE") assets from mortgage-backed pool, at fair value 269,946 — Total assets $4,410,958 $3,252,370 Liabilities and equity Liabilities Mortgage notes payable, net of deferred loan costs and mark-to-market adjustment of $40,127 and $35,397 $2,299,625 $1,776,652Revolving line of credit 57,000 41,800Term note payable, net of deferred loan costs of $0 and $6 — 10,994Real estate loan participation obligation 5,181 13,986Unearned purchase option termination fees 2,050 —Deferred revenue 43,484 27,947Accounts payable and accrued expenses 38,618 31,253Accrued interest payable 6,711 5,028Dividends and partnership distributions payable 19,258 15,680Acquired below market lease intangibles, net of amortization of $15,254 and $8,095 47,149 38,857Security deposits and other liabilities 17,611 9,407VIE liabilities from mortgage-backed pool, at fair value 264,886 —Total liabilities 2,801,573 1,971,604 Commitments and contingencies (Note 12) Equity Stockholders' equity Series A Redeemable Preferred Stock, $0.01 par value per share; 3,050 shares authorized; 1,674 and 1,250 shares issued; 1,608 and 1,222 shares outstanding at December 31, 2018 and 2017, respectively16 12Series M Redeemable Preferred Stock, $0.01 par value per share; 500 shares authorized; 44 and 15 shares issued and outstanding at December 31, 2018 and 2017, respectively— —Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Common Stock, $0.01 par value per share; 400,067 shares authorized; 41,776 and 38,565 shares issued and outstanding at December 31, 2018 and 2017, respectively418 386Additional paid-in capital 1,607,712 1,271,040Accumulated (deficit) earnings — 4,449Total stockholders' equity 1,608,146 1,275,887Non-controlling interest 1,239 4,879Total equity 1,609,385 1,280,766 Total liabilities and equity $4,410,958 $3,252,370The accompanying notes are an integral part of these consolidated financial statements.83Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Consolidated Statements of Operations Year ended December 31,(In thousands, except per-share figures) 2018 2017 2016Revenues: Rental revenues $280,079 $200,462 $137,331Other property revenues 51,386 36,641 19,302Interest income on loans and notes receivable 50,190 35,698 28,841Interest income from related parties 15,616 21,204 14,645Total revenues 397,271 294,005 200,119 Operating expenses: Property operating and maintenance 44,065 29,903 19,982Property salary and benefits (including reimbursements of $16,276, $12,329 and $10,399 to related party) 17,766 13,272 10,399Property management fees (including $8,976, $6,417 and $4,978 to related parties) 11,681 8,329 5,981Real estate taxes 42,035 31,281 21,594General and administrative 8,224 6,490 4,558Equity compensation to directors and executives 1,703 3,470 2,524Depreciation and amortization 171,136 116,777 78,140Acquisition and pursuit costs — 14 8,547Asset management and general and administrative expense fees to related party 27,541 20,226 13,637Loan loss allowance 2,533 — —Insurance, professional fees and other expenses 7,166 6,584 6,173Total operating expenses 333,850 236,346 171,535 Waived asset management and general and administrative expense fees (6,656) (1,729) (1,586) Net operating expenses 327,194 234,617 169,949 Operating income before gains on sales of real estate and trading investment 70,077 59,388 30,170Gains on sales of real estate and trading investment 69,705 37,635 4,271Operating income 139,782 97,023 34,441Interest expense 95,564 67,468 44,284Change in fair value of net assets of consolidated VIE from mortgage-backed pool 320 — —Loss on extinguishment of debt — 888 — Net income (loss) 44,538 28,667 (9,843) Consolidated net (income) loss attributable to non-controlling interests (1,071) (986) 310 Net income (loss) attributable to the Company 43,467 27,681 (9,533) Dividends declared to preferred stockholders (86,741) (63,651) (41,081)Earnings attributable to unvested restricted stock (16) (15) (16) Net loss attributable to common stockholders $(43,290) $(35,985) $(50,630) Net loss per share of Common Stock available to common stockholders, basic and diluted $(1.08) $(1.13) $(2.11) Weighted average number of shares of Common Stock outstanding, basic and diluted 40,032 31,926 23,969The accompanying notes are an integral part of these consolidated financial statements.84Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Consolidated Statements of Stockholders' EquityFor the years ended December 31, 2018, 2017 and 2016 (In thousands, except dividend per-share figures) Series A andSeries MRedeemablePreferredStock CommonStock Additional Paidin Capital AccumulatedEarnings TotalStockholders'Equity Non-ControllingInterest Total Equity Balance at January 1, 2018 $12 $386 $1,271,040 $4,449 $1,275,887 $4,879 $1,280,766Issuance of Units 4 — 420,389 — 420,393 — 420,393Issuance of mShares — — 28,951 — 28,951 — 28,951Redemptions of Series A Preferred Stock — 17 (9,445) — (9,428) — (9,428)Exercises of warrants — 12 16,042 — 16,054 — 16,054Syndication and offering costs — — (44,681) — (44,681) — (44,681)Equity compensation to executives and directors — — 537 — 537 — 537Vesting of restricted stock — — — — — — —Conversion of Class A Units to Common Stock — 3 2,011 — 2,014 (2,014) —Current period amortization of Class B Units — — — — — 1,166 1,166Net income — — — 43,467 43,467 1,071 44,538Reallocation adjustment to non-controlling interests — — 2,822 — 2,822 (2,822) —Distributions to non-controlling interests — — — — — (1,041) (1,041)Dividends to series A preferred stockholders ($5.00 per share per month) — — (37,975) (46,867) (84,842) — (84,842)Dividends to mShares preferred stockholders ($4.79 - $6.25 per share per month) — — (850) (1,049) (1,899) — (1,899)Dividends to common stockholders ($1.02 per share) — — (41,129) — (41,129) — (41,129)Balance at December 31, 2018 $16 $418 $1,607,712 $— $1,608,146 $1,239 $1,609,385The accompanying notes are an integral part of these consolidated financial statements.85Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Consolidated Statements of Stockholders' Equity, continuedFor the years ended December 31, 2018, 2017 and 2016 (In thousands, except dividend per-share figures) Series A andSeries MRedeemablePreferredStock CommonStock AdditionalPaid inCapital AccumulatedEarnings TotalStockholders'Equity Non-ControllingInterest Total Equity Balance at January 1, 2017 $9 $265 $906,738 $(23,232) $883,780 $1,481 $885,261Issuance of Units 3 — 339,313 — 339,316 — 339,316Redemptions of Series A Preferred Stock — 7 (4,507) — (4,500) — (4,500)Issuance of common stock — 50 76,755 — 76,805 — 76,805Exercises of Warrants — 62 84,390 — 84,452 — 84,452Syndication and offering costs — — (37,507) — (37,507) — (37,507)Equity compensation to executives and directors — — 467 — 467 — 467Vesting of restricted stock — — — — — — —Conversion of Class A Units to Common Stock — 2 1,751 — 1,753 (1,753) —Current period amortization of Class B Units — — — — — 3,003 3,003Net income — — — 27,681 27,681 986 28,667Minority interest in joint venture — — — — — 540 540Reallocation adjustment to non-controlling interests — — (1,465) — (1,465) 1,465 —Distributions to non-controlling interests — — — — — (843) (843)Dividends to Series A preferred stockholders ($5.00 per share per month) — — (63,176) — (63,176) — (63,176)Dividends to mShares preferred stockholders ($4.79 - $6.25 per share per month) — — (475) — (475) — (475)Dividends to common stockholders ($0.94 per share) — — (31,244) — (31,244) — (31,244)Balance at December 31, 2017 $12 $386 $1,271,040 $4,449 $1,275,887 $4,879 $1,280,766The accompanying notes are an integral part of these consolidated financial statements.86Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Consolidated Statements of Stockholders' Equity, continuedFor the years ended December 31, 2018, 2017 and 2016 Series ARedeemablePreferredStock CommonStock AdditionalPaid inCapital AccumulatedDeficit TotalStockholders'Equity NonControllingInterest Total Equity Balance at January 1, 2016 $5 $228 $536,451 $(13,699) $522,985 $2,469 $525,454Issuance of Units 4 — 438,109 — 438,113 — 438,113Redemptions of Series A Preferred Stock — 2 (3,759) — (3,757) — (3,757)Issuance of common stock — 17 23,349 — 23,366 — 23,366Exercises of warrants — 17 18,151 — 18,168 — 18,168Syndication and offering costs — — (52,621) — (52,621) — (52,621)Equity compensation to executives and directors — — 491 — 491 — 491Vesting of restricted stock — — — — — — —Conversion of Class A Units to Common Stock — 1 649 — 650 (650) —Current period amortization of Class B Units — — — — — 2,060 2,060Net loss — — — (9,533) (9,533) (310) (9,843)Class A Units for property acquisition — — — — — 5,073 5,073Minority interest in joint venture — — — — — 450 450Reallocation adjustment to non-controlling interests — — 6,940 — 6,940 (6,940) —Distributions to non-controlling interests — — — — — (671) (671)Dividends to series A preferred stockholders ($5.00 per share per month) — — (41,081) — (41,081) — (41,081)Dividends to common stockholders ($0.8175 pershare) — — (19,941) — (19,941) — (19,941) Balance at December 31, 2016 $9 $265 $906,738 $(23,232) $883,780 $1,481 $885,261The accompanying notes are an integral part of these consolidated financial statements.87Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Consolidated Statements of Cash Flows Years Ended December 31, 2018 2017 2016Operating activities: Net income (loss) $44,538 $28,667 $(9,843)Reconciliation of net income (loss) to net cash provided by operatingactivities: Depreciation and amortization expense 171,136 116,777 78,140Amortization of above and below market leases (5,905) (3,335) (1,653)Deferred revenues and fee income amortization (4,325) (2,347) (995)Purchase option termination fee amortization(8,660) — —Noncash interest income amortization on MBS, net of amortized costs(320) — —Amortization of market discount on assumed debt and lease incentives 1,644 631 —Deferred loan cost amortization 7,108 5,084 3,595Decrease (increase) in accrued interest income on real estate loaninvestments 3,524 (4,970) (7,600)Equity compensation to executives and directors 1,703 3,470 2,524Gains on sale of real estate and trading investment (69,703) (37,635) (4,272)Cash received for purchase option terminations 7,740 — —Loss on extinguishment of debt — 888 —Mortgage interest received from consolidated VIE 6,049 — —Mortgage interest paid to other participants of consolidated VIE (6,049) — —Increase in loan loss allowance 2,533 — —Other — 189 48Changes in operating assets and liabilities: (Increase) in tenant receivables and other assets (7,631) (12,105) (4,331)(Increase) in tenant lease incentives(7,607) (14,260) —Increase in accounts payable and accrued expenses 2,876 2,382 3,113Increase in accrued interest, prepaid rents and other liabilities 6,730 2,853 2,935Net cash provided by operating activities 145,381 86,289 61,661 Investing activities: Investments in real estate loans (200,806) (148,346) (151,028)Repayments of real estate loans 250,448 94,410 36,672Notes receivable issued (9,946) (7,864) (9,887)Notes receivable repaid 12,759 6,100 12,895Note receivable issued to and draws on line of credit by related parties (51,789) (35,281) (34,207)Repayments of line of credit by related parties 41,117 34,229 31,097Origination fees received on real estate loan investments4,331 2,634 3,704Origination fees paid to Manager on real estate loan investments(2,166) (1,320) (1,886)Purchases of mortgage-backed securities(45,927) — —Mortgage principal received from consolidated VIE1,255 — —Acquisition of properties (1,007,048) (779,643) (969,443)Disposition of properties, net 164,838 116,813 9,797Receipt of insurance proceeds for capital improvements978 4,719 10Additions to real estate assets - improvements (44,383) (11,594) (10,264)Deposits refunded (paid) on acquisitions 4,534 (2,034) (840)Net cash used in investing activities (881,805) (727,177) (1,083,380) Financing activities: Proceeds from mortgage notes payable 602,375 517,489 622,394Repayments of mortgage notes payable (121,797) (124,040) (12,386)Payments for deposits and other mortgage loan costs (12,299) (14,772) (19,130)Payments for mortgage prepayment costs — (817) —Proceeds from real estate loan participants 5 224 6,433Payments to real estate loan participants (10,425) (7,883) —Proceeds from lines of credit 550,300 275,000 470,136Payments on lines of credit (535,100) (360,700) (377,136)Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Proceeds from Term Loan — — 46,000Repayment of the Term Loan (11,000) — (35,000)Mortgage principal paid to other participants of consolidated VIE (1,255) — —Proceeds from sales of Units, net of offering costs 408,644 306,947 394,556Proceeds from sales of Common Stock — 74,213 22,957Proceeds from exercises of Warrants 20,052 80,970 21,503 The accompanying notes are an integral part of these consolidated financial statements. 88Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Consolidated Statements of Cash Flows - continued Years Ended December 31, 2018 2017 2016Payments for redemptions of preferred stock (9,367) (4,480) (3,651)Common Stock dividends paid (39,865) (27,409) (18,515)Preferred stock dividends paid (84,427) (61,966) (38,941)Distributions to non-controlling interests (1,034) (817) (530)Payments for deferred offering costs (3,705) (6,314) (4,685)Contribution from non-controlling interests — 540 450 Net cash provided by financing activities 751,102 646,185 1,074,455 Net increase in cash, cash equivalents and restricted cash 14,678 5,297 52,736Cash, cash equivalents and restricted cash, beginning of year 73,012 67,715 14,979Cash, cash equivalents and restricted cash, end of year $87,690 $73,012 $67,715 Supplemental cash flow information: Cash paid for interest $86,222 $59,851 $38,950 Supplemental disclosure of non-cash investing and financing activities: Accrued capital expenditures $2,317 $2,305 $353Writeoff of fully depreciated or amortized assets and liabilities $480 $836 $149Writeoff of fully amortized deferred loan costs $4,829 $411 $826Writeoff of assets due to hurricane damages $— $6,879 $—Lessee-funded tenant improvements, capitalized as landlord assets $18,202 $28,803 $—Consolidation of VIEs (VIE asset / liability additions) $264,886 $— $—Sales of Agency MBS investments, settled after year-end $41,181 $— $—Dividends payable - Common Stock $10,840 $9,576 $5,741Dividends payable - Series A Preferred Stock $7,920 $5,971 $4,419Dividends payable - mShares Preferred Stock $269 $70 $—Dividends declared but not yet due and payable $229 $63 $—Partnership distributions payable to non-controlling interests $228 $221 $195Accrued and payable deferred offering costs $461 $323 $684Offering cost reimbursement to related party $1,890 $1,512 $453Reclass of offering costs from deferred asset to equity $4,044 $2,515 $8,749Proceeds of like-kind exchange funds for dispositions $— $31,288 $—Use of like-kind exchange funds for acquisitions $— $31,288 $—Fair value of OP units issued for property $— $— $5,073Extinguishment of land loan for property $— $— $6,250Fair value issuances of equity compensation $4,972 $4,088 $3,188Mortgage loans assumed on acquisitions $47,125 $90,722 $49,034Noncash repayment of mortgages through refinance $152,770 $162,945 $— Real estate loan investment balance applied to purchase of property $— $— $12,500The accompanying notes are an integral part of these consolidated financial statements.89Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial StatementsDecember 31, 2018(unaudited)1.Organization and Basis of PresentationPreferred Apartment Communities, Inc. was formed as a Maryland corporation on September 18, 2009, and elected to be taxed as a real estate investmenttrust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code, effective with its tax year ended December 31, 2011. Unless the contextotherwise requires, references to the "Company", "we", "us", or "our" refer to Preferred Apartment Communities, Inc., together with its consolidatedsubsidiaries, including Preferred Apartment Communities Operating Partnership, L.P., or the Operating Partnership. The Company was formed primarily toacquire and operate multifamily properties in select targeted markets throughout the United States. As part of its business strategy, the Company may enterinto forward purchase contracts or purchase options for to-be-built multifamily communities and may make real estate related loans, provide depositarrangements, or provide performance assurances, as may be necessary or appropriate, in connection with the development of multifamily communities andother properties. As a secondary strategy, the Company also may acquire or originate senior mortgage loans, subordinate loans or real estate loan investmentssecured by interests in multifamily properties, membership or partnership interests in multifamily properties and other multifamily related assets and invest alesser portion of its assets in other real estate related investments, including other income-producing property types, senior mortgage loans, subordinate loansor real estate loan investments secured by interests in other income-producing property types, or membership or partnership interests in other income-producing property types as determined by its Manager (as defined below) as appropriate for the Company. The Company is externally managed and advisedby Preferred Apartment Advisors, LLC, or its Manager, a Delaware limited liability company and related party (see Note 7).As of December 31, 2018, the Company had 41,775,855 shares of common stock, par value $0.01 per share, or Common Stock, issued and outstanding andwas the approximate 97.9% owner of the Operating Partnership at that date. The number of partnership units not owned by the Company totaled 877,454 atDecember 31, 2018 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 atthe 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 thetrailing 20-day volume weighted average price of the Company's Common Stock.The Company controls the Operating Partnership through its sole general partner interest and conducts substantially all of its business through the OperatingPartnership. The Company has determined the Operating Partnership is a variable interest entity, or VIE, of which the Company is the primary beneficiary.The Company is involved with other VIEs, such as its investment in the Freddie Mac Series 2018-ML04 mortgage loan pool, as discussed in Note 5. NewMarket Properties, LLC owns and conducts the business of our portfolio of grocery-anchored shopping centers. Preferred Office Properties, LLC owns andconducts the business of our portfolio of office buildings. Preferred Campus Communities, LLC owns and conducts the business of our portfolio of off-campus student housing communities. Each of these entities are wholly-owned subsidiaries of the Operating Partnership.Basis of PresentationThese consolidated financial statements include all of the accounts of the Company and the Operating Partnership presented in accordance with accountingprinciples generally accepted in the United States of America, or GAAP. All significant intercompany transactions have been eliminated in consolidation.Certain adjustments have been made consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair presentation of theCompany's financial condition and results of operations. The preparation of the financial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ fromthose estimates. Amounts are presented in thousands where indicated. 2.Summary of Significant Accounting PoliciesAcquisitions and Impairments of Real Estate AssetsWhen the Company acquires a property, it allocates the aggregate purchase price to tangible assets, consisting of land, building, site improvements andfurniture, fixtures and equipment, and identifiable intangible assets, consisting of the value of in-place leases and above-market and below-market leases asdescribed further below, using estimated fair values of each component at the time of purchase. The Company follows the guidance as outlined in ASC 805-10, Business Combinations, as amended by ASU 2017-01. As described below in the section entitled New Accounting Pronouncements, AccountingStandards Update 2017-01 was adopted by the Company effective January 1, 2017, which changed the definition of a business. Under this new guidance,90Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018most property acquisitions made by the Company will fall within the category of acquired assets rather than acquired businesses. This distinction will causethe Company to capitalize its costs for acquisitions (including, effective July 1, 2017, a 1% acquisition fee), allocate them to the fair value of acquired assetsand liabilities and amortize these costs over the remaining useful lives of those assets and liabilities. Should the Company complete any acquisitions in thefuture which qualify as acquisitions of businesses, associated acquisition costs would be expensed as incurred.Tangible assetsThe fair values of land acquired is calculated under the highest and best use model, using formal appraisals and comparable land sales, among other inputs.Building value is determined by valuing the property on a “go-dark” basis as if it were vacant, and also using a replacement cost approach, which two resultsare then reconciled. Site improvements are valued using replacement cost. Management determines the as-if-vacant fair value of a property using methodssimilar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs duringthe expected lease-up periods considering current market conditions and costs to execute similar leases, including leasing commissions and other relatedcosts. The values of furniture, fixtures, and equipment are estimated by calculating their replacement cost and reducing that value by factors based uponestimates of their remaining useful lives.Identifiable intangible assetsIn-place leasesMultifamily communities and student housing propertiesThe fair value of in-place leases are estimated by calculating the estimated time to fill a hypothetically empty apartment complex to its stabilizationlevel (estimated to be 93% occupancy) based on historical observed move-in rates for each property, and which approximate market rates. Carryingcosts during these hypothetical expected lease-up periods are estimated, considering current market conditions and include real estate taxes,insurance and other operating expenses and estimates of lost rentals at market rates. The intangible assets are calculated by estimating the net cashflows of the in-place leases to be realized, as compared to the net cash flows that would have occurred had the property been vacant at the time ofacquisition and subject to lease-up. The acquired in-place lease values are amortized over the average remaining non-cancelable term of therespective in-place leases in the depreciation and amortization line of the statements of operations.Grocery-anchored shopping centers and office propertiesThe fair value of in-place leases represent the value of direct costs associated with leasing, including opportunity costs associated with lost rentalsthat are avoided by acquiring in-place leases. Direct costs associated with obtaining a new tenant include commissions, legal and marketing costs,incentives such as tenant improvement allowances and other direct costs. Such direct costs are estimated based on our consideration of currentmarket costs to execute a similar lease. The value of opportunity costs is calculated using the estimated market lease rates and the estimatedabsorption period of the space. These direct costs and opportunity costs are included in the accompanying consolidated balance sheets as acquiredintangible assets and are amortized over the remaining term of the respective leases in the depreciation and amortization line of the statements ofoperations.Above-market and below-market lease valuesMultifamily communities and student housing propertiesThese values are usually not significant or are not applicable for these properties.Grocery-anchored shopping centers and office propertiesThe values of above-market and below-market leases are developed by comparing the Company's estimate of the average market rents and expensereimbursements to the average contract rent at the property acquisition date. The amount by which contract rent and expense reimbursements exceedestimated market rent are summed for each individual lease and discounted for a singular aggregate above-market lease intangible asset for theproperty. The amount by which estimated market rent exceeds contract rent and expense reimbursements are summed for each individual lease anddiscounted for a singular aggregate below-market lease intangible liability. The above-market or below-market lease values are recorded as areduction or increase, respectively, to rental revenue over the remaining noncancelable term of the respective leases, plus any below-marketprobable renewal options.91Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018Impairment AssessmentThe Company evaluates its tangible and identifiable intangible real estate assets for impairment when events such as declines in a property’s operatingperformance, deteriorating market conditions, or environmental or legal concerns bring recoverability of the carrying value of one or more assets intoquestion. When qualitative factors indicate the possibility of impairment, the total undiscounted cash flows of the property, including proceeds fromdisposition, are compared to the net book value of the property. If this test indicates that impairment exists, an impairment loss is recorded in earnings equalto the shortage of the book value to fair value, calculated as the discounted net cash flows of the property.Agency Mortgage-Backed SecuritiesThe Company has invested in mortgage-backed securities that represent interests in pools of residential mortgage loans guaranteed by the GovernmentNational Mortgage Association (“Ginnie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or the Federal National MortgageAssociation (“Fannie Mae”) (collectively, “Agency Mortgage-Backed Securities”). The Company records its investments in Agency Mortgage-Backed Securities at fair value on the accompanying Consolidated Balance Sheet on the tradedate. The Company elects to account for Agency Mortgage-Backed Securities as trading securities and in doing so recognizes periodic changes in fair valuein earnings on the Company’s Consolidated Statements of Operations. Fair values in periods subsequent to the Company's initial investment are estimatedutilizing a third-party pricing service. The Company records interest income from Agency Mortgage-Backed Securities utilizing the effective interest method. Coupon income, which is acomponent of interest income, is based upon the outstanding principal amounts of the Agency Mortgage-Backed Securities and their contractual terms. Inaddition, the Company amortizes or accretes premiums or discounts into interest income for its Agency Mortgage-Backed Securities, taking into accountestimates of future principal prepayments in the calculation of the effective yield. The Company recalculates the effective yield as differences betweenanticipated and actual prepayments occur. Using third-party model and market information to project future cash flows and expected remaining lives ofsecurities, the effective interest rate determined for each security is applied as if it had been in place from the date of the security’s acquisition. The amortizedcost of the security is then adjusted to the amount that would have existed had the new effective yield been applied since the acquisition date, which resultsin a cumulative premium amortization adjustment in each period. The adjustment to amortized cost is offset with a charge or credit to interest income.Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in anygiven period.See section entitled "Variable Interest Entities" below.Deferred Leasing CostsCosts incurred to obtain tenant leases are amortized using the straight-line method over the term of the related lease agreement. Such costs include leaseincentives, leasing commissions and legal costs. If the lease is terminated early, the remaining unamortized deferred leasing cost is written off.Variable Interest EntitiesA variable interest entity, or “VIE” is an entity that lacks sufficient equity to finance its activities without additional subordinated financial support fromother parties, or whose equity holders lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary, which isdefined as the party who has a controlling financial interest in the VIE through the (a) power to direct the activities of the VIE that most significantly affectthe VIE’s economic performance, and (b) obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. The Companyassesses whether it meets the power and benefits criteria and in performing this analysis, the Company considers both qualitative and quantitative factors,including the Company’s ability to control or significantly influence key decisions of the VIE and the obligation or likelihood for the Company to fundoperating losses of the VIE. The determination of whether an entity is a VIE, and whether the Company is the primary beneficiary, may involve significantjudgment, including the determination of which activities most significantly affect the entities’ performance, and estimates about the current and future fairvalues and performance of assets held by the VIE. If the Company determines that it meets both the power and benefits criteria of the VIE, the Company isdeemed to be the primary beneficiary of the VIE and the Company consolidates the entire VIE entity in its consolidated financial statements. For those VIEswhich arise from the Company's investment in mortgage-backed securities and which the Company consolidates, it elects the fair value option, under whichthe assets and liabilities of the consolidated VIE are carried at fair value. The periodic changes in fair value are included in the earnings of the Company andare reported on the line entitled Change in fair value of net assets of92Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018consolidated VIE from mortgage-backed pool on the Company's Consolidated Statements of Operations. See Note 5 for discussion related to the Company’sinvestment in a subordinate tranche of a collateralized mortgage-backed pool during the second quarter 2018 and Note 17 for fair value disclosures related toa consolidated VIE related to this investment. Real Estate LoansThe Company carries its investments in real estate loans at amortized cost with assessments made for impairment in the event recoverability of the principalamount becomes doubtful. If, upon testing for impairment, the fair value result of the loan or its collateral is lower than the carrying amount of the loan, anallowance is recorded to lower the carrying amount to fair value, with a loss recorded in earnings. The balances of real estate loans presented on theconsolidated balance sheets consist of drawn amounts on the loans, net of unamortized deferred loan origination fees and allowances for loan loss. These loanbalances are presented in the asset section of the consolidated balance sheets inclusive of loan balances from third party participant lenders, with theparticipant obligation amount presented within the liabilities section.Interest income on real estate loans and notes receivable is recognized on an accrual basis over the lives of the loans or notes. In the event that a loan or noteis refinanced with the proceeds of another loan issued by the Company, any unamortized loan fee revenue from the first loan will be recognized as interestrevenue at the date of refinancing. Loan origination fees applicable to real estate loans are amortized over the lives of the loans as adjustments to interestincome using the effective interest rate method. The accrual of interest on all these instruments ceases when there is concern as to the ultimate collection ofprincipal or interest. Certain real estate loan assets include limited purchase options and either exit fees or additional amounts of accrued interest. Exit fees oraccrued interest due will be treated as additional consideration for the acquired project if the Company purchases the subject property. Additional accruedinterest becomes due in cash to the Company on the earliest to occur of: (i) the maturity of the loan, (ii) any uncured event of default as defined in theassociated loan agreement, (iii) the sale of the project or the refinancing of the loan (other than a refinancing loan by the Company or one of its affiliates) and(iv) any other repayment of the loan.Evaluations for impairment are performed for each real estate loan investment at least quarterly. Impairment occurs when it is deemed probable that allamounts due will not be collected according to the contractual terms of the loan. Depending upon the circumstances and significance of risk related to thecollectability of the loan, management may determine that (i) the loan should be accounted for as a non-accrual loan because recovery of all contractualamounts due are deemed improbable and that any amounts subsequently received will be used to reduce the loan’s principal balance, (ii) in the event of amodification to the loan granted by the Company as a concession to the borrower who is experiencing financial difficulty, result in the need to applytroubled debt restructuring (“TDR”) accounting guidance, and/or (iii) an allowance for loan loss is required for the loan based upon the value of theunderlying collateral and the Company’s evaluation of a possible shortfall with regards to the loan’s repayment based upon an estimated sales price,additional costs (if necessary), estimated selling costs, and amounts due to all lenders.In connection with the surveillance review process, the Company’s real estate loan investments are assigned an internal risk rating. The internal risk ratingsare based on the loan’s current status as compared to underwriting for certain metrics such as total expected construction cost if overruns are noted,construction completion timing if there are delays, current cap rates within the MSA, leasing status, rental rates, net operating income, expected free cashflow, and other factors management deems important related to the ultimate collectability of the loan. The final internal risk ratings are influenced by otherquantitative and qualitative factors that can result in an adjustment to the ratings. Each loan is given an internal risk rating from “A” to “D”. Loans rated an“A” meet all present contractual obligations and there are no indicators which would cause concern for the borrower’s ability to meet all present contractualobligations. Loans rated a “B” meet all present contractual obligations, but exhibited at least one indication of a negative variation from the underwriting forthe loan and/or project. Loans rated a “C” exhibit some weakness that deserves management’s close attention and if uncorrected, may result in deteriorationof repayment prospects. For these loans, management performs analyses to verify the borrower’s ability to meet all present contractual obligations, includingobtaining an appraisal of the underlying collateral for the loan. Based on the available collateral to satisfy the Company’s outstanding principal and interestcontractually due, we may provide for an allowance, move the loan to non-accrual status for future interest recognition or continue monitoring the loan. Forloans rated a “D”, the collection of all contractual principal and interest is improbable and management has determined to account for the loan as a non-accrual loan and, if appropriate under the circumstances record a loan loss allowance.The Company's real estate loan investments are collateralized by real estate development projects and secured further by guaranties of repayment from one ormore of the borrowers. The Company's lines of credit receivable are typically only collateralized by personal guaranties, but occasionally may be cross-collateralized by interests in other real estate projects. As a result, the Company regularly evaluates the extent and impact of any credit deteriorationassociated with the performance and/or value of the underlying93Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018collateral property, as well as the financial and operating capability of the borrower. Specifically, a property’s operating results and any cash reserves areanalyzed and used to assess (i) whether cash from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability ofthe borrower to refinance the loan, and/or (iii) the property’s liquidation value. The Company also evaluates the financial wherewithal of any loan guarantorsas well as the borrower’s competency in managing and operating the properties. In addition, the overall economic environment, real estate sector, andgeographic sub‑market in which the borrower operates are considered. Such impairment analyses are completed and reviewed by management, utilizingvarious data sources, including periodic financial data such as property operating statements, occupancy, tenant profile, rental rates, operating expenses, theborrower’s exit plan, capitalization and discount rates and site inspections.See the "Revenue Recognition" section of this Note for other loan-related policy disclosures required by ASC 310-10-50-6.Purchase Option TerminationsThe Company will occasionally receive a purchase option on the underlying property in conjunction with extending a real estate loan investment to thedeveloper of the property. The purchase option is often at a discount to the to-be-agreed-upon market value of the property, once stabilized. If the Companyelects not to exercise the purchase option and acquire the property, it may negotiate to sell the purchase option back to the developer and receive atermination fee in consideration. The amount of the termination fee is accounted for as additional interest on the real estate loan investment and is recognizedas interest revenue utilizing the effective interest method over the period beginning from the date of election until the earlier of (i) the maturity of the realestate loan investment and (ii) the sale of the property.Cash and Cash Equivalents and Restricted CashThe Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Restrictedcash includes cash restricted by state law or contractual requirement and relates primarily to real estate tax and insurance escrows, capital improvementreserves and resident security deposits.Fair Value MeasurementsCertain assets and liabilities are required to be carried at fair value, or if they are deemed impaired, to be adjusted to reflect this condition. The Companyfollows the guidance provided by ASC 820, Fair Value Measurements and Disclosures, in accounting and reporting for real estate assets where appropriate,as well as debt instruments both held for investment and as liabilities. The standard requires disclosure of fair values calculated utilizing each of thefollowing input type within the following hierarchy:• Level 1 – Quoted prices in active markets for identical assets or liabilities at the measurement date.• Level 2 – Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.• Level 3 – Unobservable inputs for the asset or liability.Deferred Loan CostsDeferred loan costs are amortized using the effective interest rate method, over the terms of the related indebtedness.Non-controlling InterestNon-controlling interest represents the equity interest of the Operating Partnership that is not owned by the Company. Non-controlling interest is adjusted forcontributions, distributions and earnings or loss attributable to the non-controlling interest in the consolidated entity in accordance with the Agreement ofLimited Partnership of the Operating Partnership, as amended.Redeemable Preferred StockShares of the Series A Redeemable Preferred Stock, stated value $1,000 per share, or Series A Preferred Stock, and Series M Redeemable Preferred Stock,stated value $1,000 per share, or mShares, are both redeemable at the option of the holder, subject to a declining redemption fee schedule. Redemptions aretherefore outside the control of the Company. However, the Company retains the right to fund any redemptions of Series A Preferred Stock or mShares ineither Common Stock or cash at its option. Therefore, the Company records the Series A Preferred Stock and mShares as components of permanentstockholders’ equity.94Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018Deferred Offering CostsDeferred offering costs represent direct costs incurred by the Company related to current equity offerings, excluding costs specifically identifiable to aclosing, such as commissions, dealer-manager fees, and other registration fees. For issuances of equity that occur on one specific date, associated offeringcosts are reclassified as a reduction of proceeds raised on the date of issue. Our ongoing offering of up to a maximum of 1,500,000 Units, consisting of oneshare of Series A Redeemable Preferred Stock and one warrant, or Warrant, to purchase 20 shares of Common Stock, or Units, generally closes on a bimonthlybasis in variable amounts. Such offering is referred to herein as the $1.5 Billion Unit Offering, pursuant to our registration statement on Form S-3 (registrationnumber 333-211924), as may be amended from time to time. Deferred offering costs related to the $1.5 Billion Unit Offering, Shelf Offering and mSharesOffering (the latter two as defined in Note 6) are reclassified to the stockholders’ equity section of the consolidated balance sheet as a reduction of proceedsraised on a pro-rata basis equal to the ratio of total Units or value of shares issued to the maximum number of Units or the value of shares, as applicable, thatare expected to be issued.Revenue RecognitionMultifamily communities and student housing propertiesRental revenue is recognized when earned from residents of the Company's multifamily communities, which is over the terms of rental agreements, typicallyof 13 months’ duration. The Company evaluates the collectability of amounts due from residents and maintains an allowance for doubtful accounts forestimated losses resulting from the inability of residents to make required payments then due under lease agreements. The balance of amounts due fromresidents are generally deemed uncollectible 30 days beyond the due date, at which point they are fully reserved.Grocery-anchored shopping centers and office propertiesRental revenue from tenants' operating leases in the Company's grocery-anchored shopping centers and office properties is recognized on a straight-line basisover the term of the lease. Revenue based on "percentage rent" provisions that provide for additional rents that become due upon achievement of specifiedsales revenue targets (as specified in each lease agreement) is recognized only after the tenant exceeds its specified sales revenue target. Revenue fromreimbursements of the tenants' share of real estate taxes, insurance and common area maintenance, or CAM, costs are recognized in the period in which therelated expenses are incurred. Lease termination revenues are recognized ratably over the revised remaining lease term after giving effect to the terminationnotice or when tenant vacates and the Company has no further obligations under the lease. Rents and tenant reimbursements collected in advance arerecorded as prepaid rent within other liabilities in the accompanying consolidated balance sheets. The Company estimates the collectability of the tenantreceivable related to rental and reimbursement billings due from tenants and straight-line rent receivables, which represent the cumulative amount of futureadjustments necessary to present rental revenue on a straight-line basis, by taking into consideration the Company's historical write-off experience, tenantcredit-worthiness, current economic trends, and remaining lease terms.The Company may provide grocery-anchored shopping center and office building tenants an allowance for the construction of leasehold improvements.These leasehold improvements are capitalized and depreciated over the shorter of the useful life of the improvements or the remaining lease term. If theallowance represents a payment for a purpose other than funding leasehold improvements, or in the event the Company is not considered the owner of theimprovements, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of rental revenue. Determination of theappropriate accounting for the payment of a tenant allowance is made on a lease-by-lease basis, considering the facts and circumstances of the individualtenant lease. When the Company is the owner of the leasehold improvements, recognition of rental revenue commences when the lessee is given possessionof the leased space upon completion of tenant improvements. However, when the leasehold improvements are owned by the tenant, the lease inception date isthe date the tenant obtains possession of the leased space for purposes of constructing its leasehold improvements. For our office properties, if theimprovement is deemed to be a “landlord asset,” and the tenant funded the tenant improvements, the cost is amortized over the term of the underlying leasewith a corresponding recognition of rental revenues. In order to qualify as a landlord asset, the specifics of the tenant’s assets are reviewed, including theCompany's approval of the tenant’s detailed expenditures, whether such assets may be usable by other future tenants, whether the Company has consent toalter or remove the assets from the premises and generally remain the Company's property at the end of the lease.Gains on sales of real estate assetsThe Company recognizes gains on sales of real estate based on the difference between the consideration received and the carrying amount of the distinctasset, including the carrying amount of any liabilities relieved or assumed by the purchasing counterparty.95Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018Stock-Based CompensationThe Company accounts for stock-based compensation in accordance with guidance provided by ASC 505-50, Equity-Based Payments to Non-Employees andASC 718, Stock Compensation. We calculate the fair value of Class B Unit grants at the date of grant utilizing a Monte Carlo simulation model based uponestimates of their expected term, the expected volatility of and dividend yield on our Common Stock over this expected term period and the market risk-freerate of return. The compensation expense is accrued on a straight-line basis over the vesting period(s). We record the fair value of restricted stock awardsbased upon the closing stock price on the trading day immediately preceding the date of grant.Acquisition CostsThrough December 31, 2016, the Company expensed property acquisition costs as incurred, which include costs such as due diligence, legal, certainaccounting, environmental and consulting, when the acquisitions constituted business combinations. As described below in the section entitled NewAccounting Pronouncements, Accounting Standards Update 2017-01 was adopted by the Company effective January 1, 2017, which changed the definitionof a business. Under this new guidance, most property acquisitions made by the Company will fall within the category of acquired assets rather than acquiredbusinesses. This distinction will cause the Company to capitalize its costs for acquisitions (including, effective July 1, 2017, a 1% acquisition fee), allocatethem to the fair value of acquired assets and liabilities and amortize these costs over the remaining useful lives of those assets and liabilities. Should theCompany complete any acquisitions in the future which qualify as acquisitions of businesses, associated acquisition costs would be expensed as incurred.Capitalization and DepreciationThe Company capitalizes tenant improvements, replacements of furniture, fixtures and equipment, as well as carpet, appliances, air conditioning units,certain common area items and other assets. Significant repair and renovation costs that improve the usefulness or extend the useful life of the properties arealso capitalized. These assets are then depreciated on a straight-line basis over their estimated useful lives, as follows:• Buildings: 30 - 50 years• Furniture, fixtures & equipment: 5 - 10 years• Improvements to buildings and land: 5 - 20 years• Tenant improvements: shorter of economic life or lease termOperating expenses related to unit turnover costs, such as carpet cleaning and minor repairs are expensed as incurred.Income TaxesThe Company has elected to be taxed as a REIT under the Code. To continue to qualify as a REIT, the Company must meet certain organizational andoperational requirements, including a requirement to distribute at least 90% of the Company's annual REIT taxable income to its stockholders (which iscomputed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordancewith GAAP). As a REIT, the Company generally will not be subject to federal income tax to the extent it distributes 100% of the Company's annual REITtaxable income to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable incomeat the corporate income tax rate and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxableyears following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions.Such an event could have a material adverse affect on the Company's net income and net cash available for distribution to stockholders. The Companyintends to operate in such a manner as to maintain its election for treatment as a REIT.The Company recognizes a liability for uncertain tax positions. An uncertain tax position is defined as a position taken or expected to be taken in a tax returnthat is not based on clear and unambiguous tax law and which is reflected in measuring current or deferred income tax assets and liabilities for interim orannual periods. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will besustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized basedon the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company recognizes interest and penaltiesrelated to unrecognized tax benefits in its provision for income taxes.96Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018Earnings (Loss) Per ShareBasic earnings (loss) per share is computed by dividing net income or loss available to common stockholders by the weighted average number of shares ofCommon Stock outstanding for the period. Net income or loss attributable to common stockholders is calculated by deducting dividends due to preferredstockholders, including deemed non-cash dividends emanating from beneficial conversion features within convertible preferred stock, as well asnonforfeitable dividends due to holders of unvested restricted stock, which are participating securities under the two-class method of calculating earnings pershare. Diluted earnings (loss) per share is computed by dividing net income or net loss available to common stockholders by the weighted average number ofshares of Common Stock outstanding adjusted for the effect of dilutive securities such as share grants or warrants. No adjustment is made for potentialcommon stock equivalents that are anti-dilutive during the period.New Accounting PronouncementsStandardDescriptionDate of AdoptionEffect on theConsolidatedFinancialStatementsRecently Adopted Accounting GuidanceASU 2014-09,Revenue fromContracts withCustomers(Topic 606)ASU 2014-09 provides a single comprehensive revenue recognitionmodel for contracts with customers (excluding certain contracts, such aslease contracts) to improve comparability within industries. ASU 2014-09 requires an entity to recognize revenue to reflect the transfer of goodsor services to customers at an amount the entity expects to be paid inexchange for those goods and services and provide enhanced disclosures,all to provide more comprehensive guidance for transactions such asservice revenue and contract modifications.January 1, 2018The adoptionof ASU 2014-09 had nomaterial effectupon theCompany'sconsolidatedfinancialstatements.ASU 2016-01"), FinancialInstrumentsOverall(Subtopic 825-10): RecognitionandMeasurement ofFinancial Assetsand LiabilitiesASU 2016-01 eliminated the requirement to disclose the significantinputs and assumptions underlying the fair value calculations of itsfinancial instruments which are carried at amortized cost.January 1, 2018The adoptionof ASU 2016-01 had noeffect upontheCompany'sconsolidatedfinancialstatements.ASU 2016-15, Statement ofCash Flows(Topic 326):Classification ofCertain CashReceipts andCash PaymentsASU 2016-15 clarifies or establishes guidance for the presentation ofvarious cash transactions on the statement of cash flows. The portion ofthe guidance applicable to the Company's business activities include therequirement that cash payments for debt prepayment or debtextinguishment costs be presented as cash out flows for financingactivities.January 1, 2018The adoptionof ASU 2016-15 had noeffect upontheCompany'sconsolidatedfinancialstatements.ASU 2016-18,Statement ofCash Flows(Topic 230):Restricted CashASU 2016-18 requires restricted cash to be presented with cash and cashequivalents when reconciling the beginning and ending amounts in thestatements of cash flows.January 1, 2018The adoptionof ASU 2016-18 had nomaterial effectupon theCompany'sconsolidatedfinancialstatements.97Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018StandardDescriptionDate of AdoptionEffect on the ConsolidatedFinancial StatementsASU 2017-05, OtherIncome - Gains andLosses from theDerecognition ofNonfinancial Assets(Subtopic 610-20):Clarifying the Scopeof AssetDerecognitionGuidance andAccounting forPartial Sales ofNonfinancial AssetsASU 2017-05 provides guidance for recognizing gainsand losses from the transfer of nonfinancial assets andfor partial sales of nonfinancial assets. The newstandard clarifies that an entity should identify eachdistinct nonfinancial asset or in substance nonfinancialasset promised to a counterparty and derecognize eachasset when a counterparty obtains control of it. Theamendments also clarify that an entity should allocateconsideration to each distinct asset by applying theguidance in Topic 606 on allocating the transactionprice to performance obligations for sales to customers.January 1, 2018The adoption of ASU 2017-05 had no effect upon theCompany's consolidatedfinancial statements. Recently Issued Accounting Guidance Not Yet AdoptedASU 2016-02,Leases (ASC 842)ASU 2016-02 requires a lessor to separate leasecomponents from non-lease components, such asmaintenance services or other activities that transfer agood or service to our residents and tenants in acontract. In its March 2018 meeting, the FASBapproved a practical expedient for lessors to elect, byclass of underlying assets, to not separate lease andnon-lease components if both (1) the timing and patternof revenue recognition are the same for the non-leasecomponent(s) and related lease component and (2) thecombined single lease component would be classifiedas an operating lease.January 1, 2019The Company believes thatadoption of the practicalexpedient will result in thereimbursement of propertytaxes and insurance will becombined with the base rentrevenue and presentedwithin rental incomeinstead of other income, butwill have no material effecton the timing of revenuerecognition.ASU 2016-13,FinancialInstruments - CreditLosses (ASC 326)ASU 2016-13 requires that financial assets measured atamortized cost basis be presented at the net amountexpected to be collected, with the establishment of anallowance for credit losses expected overall, based onrelevant information from historical events.January 1, 2020The Company has not yetdetermined whether itsadoption of ASU 2016-13will have a material impacton its financial statements.ASU 2018-20,Leases (ASC 842),Narrow-ScopeImprovements forLessorsASU 2018-20 eliminates the requirement to recordincome and offsetting expense for certain variable costspaid for by lessees on behalf of lessors.January 1, 2019The Company will nolonger record income andexpense for property taxespaid directly to the taxingauthority by a lessee uponadoption of the standard.The effect will be areduction of other propertyrevenues and of propertytax expense, with no effectupon net income /loss.98Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 20183. Real Estate AssetsThe Company's real estate assets consisted of: As of: December 31,2018 December 31,2017Multifamily communities: Properties (1) 32 30Units 9,768 9,521New Market Properties: (2) Properties 45 39Gross leasable area (square feet) (3) 4,730,695 4,055,461Student housing properties: Properties 7 4Units 1,679 891Beds 5,208 2,950Preferred Office Properties: Properties 7 4Rentable square feet 2,578,000 1,352,000 (1) The acquired second phases of CityPark View and Crosstown Walk communities are managed incombination with the initial phases and so together are considered a single property, as are theLenox Village and Regent at Lenox Village assets within the Lenox Portfolio.(2) See Note 14, Segment information.(3) The Company also owns approximately 47,600 square feet of gross leasable area of ground floorretail space which is embedded within the Lenox Portfolio and not included in the totals above forNew Market Properties.Multifamily communities soldOn December 11, 2018, the Company closed on the sale of its 192-unit multifamily community in Austin, Texas, or McNeil Ranch, to an unrelated thirdparty for a purchase price of $30.0 million, exclusive of closing costs and resulting in a gain of $13.9 million. McNeil Ranch contributed approximately $0.2million and $0.1 million of net income to the consolidated operating results of the Company for the years ended December 31, 2018 and 2017, respectively.On October 23, 2018, the Company closed on the sale of its 364-unit multifamily community in Nashville, Tennessee, or Stoneridge Farms at the Hunt Club,to an unrelated third party for a purchase price of $55.0 million, exclusive of closing costs and resulting in a gain of $16.8 million. Stoneridge Farms at theHunt Club contributed approximately $0.6 million and $0.4 million of net income to the consolidated operating results of the Company for the years endedDecember 31, 2018 and 2017, respectively.On September 28, 2018, the Company closed on the sale of its 216-unit multifamily community in Philadelphia, Pennsylvania, or Stone Rise, to an unrelatedthird party for a purchase price of approximately $42.5 million, exclusive of closing costs and resulting in a gain of $18.6 million. Stone Rise contributedapproximately $0.5 million and $0.8 million of net income to the consolidated operating results of the Company for the years ended December 31, 2018 and2017, respectively.On March 20, 2018, the Company closed on the sale of its 328-unit multifamily community in Raleigh, North Carolina, or Lake Cameron, to an unrelatedthird party for a purchase price of approximately $43.5 million, exclusive of closing costs and resulting in a gain of $20.4 million. Lake Cameron contributedapproximately $0.2 million and $0.4 million of net income to the consolidated operating results of the Company for the years ended December 31, 2018 and2017, respectively.On May 25, 2017, the Company closed on the sale of its 300-unit multifamily community in Dallas, Texas, or Enclave at Vista Ridge, to an unrelated thirdparty for a purchase price of $44.0 million, exclusive of closing costs and resulting in a gain of $6.999Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018million. Enclave at Vista Ridge contributed approximately $0.1 million of net loss to the consolidated operating results of the Company for the year endedDecember 31, 2017.On March 7, 2017, the Company closed on the sale of its 408-unit multifamily community in Atlanta, Georgia, or Ashford Park, to an unrelated third party fora purchase price of $65.5 million, exclusive of closing costs and resulting in a gain of $30.4 million. Ashford Park contributed approximately $0.4 million ofnet income to the consolidated operating results of the Company for the year ended December 31, 2017.On January 20, 2017, the Company closed on the sale of its 364-unit multifamily community in Kansas City, Kansas, or Sandstone Creek, to an unrelatedthird party for a purchase price of $48.1 million, exclusive of closing costs and resulting in a gain of $0.3 million. Sandstone Creek contributedapproximately $0.1 million of net loss to the consolidated operating results of the Company for the year ended December 31, 2017.Each of the gains recorded for these sales transactions were net of disposition expenses and debt defeasance-related costs and prepayment premiums, asdescribed in Note 10.The carrying amounts of the significant assets and liabilities of the disposed properties at the dates of sale were: McNeil Ranch Stoneridge Farms atthe Hunt Club Stone Rise Lake Cameron(in thousands)December 11,2018 October 23, 2018 September 28,2018 March 20, 2018Real estate assets: Land$2,100 $3,026 $6,950 $4,000Building and improvements16,300 35,740 18,860 21,519Furniture, fixtures and equipment2,096 4,305 3,292 3,687Accumulated depreciation(5,252) (6,601) (6,722) (7,220) Total assets$15,244 $36,470 $22,380 $21,986 Liabilities: Mortgage note payable$13,418 $25,626 $23,520 $19,736Supplemental mortgage note— — — — Total liabilities$13,418 $25,626 $23,520 $19,736 Sandstone Creek Ashford Park Enclave at VistaRidge(in thousands)January 20, 2017 March 7, 2017 May 25, 2017Real estate assets: Land$2,846 $10,600 $4,705Building and improvements41,860 24,075 29,916Furniture, fixtures and equipment5,278 4,223 2,874Accumulated depreciation(4,809) (6,816) (3,556) Total assets$45,175 $32,082 $33,939 Liabilities: Mortgage note payable$30,840 $25,626 $24,862Supplemental mortgage note— 6,374 — Total liabilities$30,840 $32,000 $24,862100Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018Multifamily communities acquiredDuring the years ended December 31, 2018 and 2017, the Company completed the acquisition of the following multifamily communities:Acquisitiondate Property Location Units 1/9/2018 The Lux at Sorrel Jacksonville, Florida 2652/28/2018 Green Park Atlanta, Georgia 3109/27/2018 The Lodge at Hidden River Tampa, Florida 30011/9/2018 Vestavia Reserve Birmingham, Alabama 27211/15/2018 CityPark View South Charlotte, North Carolina 200 1,347 3/3/2017 Broadstone at Citrus Village Tampa, Florida 2963/24/2017 Retreat at Greystone Birmingham, Alabama 3123/31/2017 Founders Village Williamsburg, Virginia 2474/26/2017 Claiborne Crossing Louisville, Kentucky 2427/26/2017 Luxe at Lakewood Ranch Sarasota, Florida 2809/27/2017 Adara Overland Park Kansas City, Kansas 2609/29/2017 Aldridge at Town Village Atlanta, Georgia 3009/29/2017 The Reserve at Summit Crossing Atlanta, Georgia 17211/21/2017 Overlook at Crosstown Walk Tampa, Florida 18012/20/2017 Colony at Centerpoint Richmond, Virginia 255 2,544The aggregate purchase prices of the multifamily acquisitions for the years ended December 31, 2018 and 2017 were approximately $258.6 million and$450.8 million, respectively, exclusive of acquired escrows, security deposits, prepaids, capitalized acquisition costs and other miscellaneous assets andassumed liabilities.101Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018The Company allocated the purchase prices and capitalized acquisition costs to the acquired assets and liabilities based upon their fair values, as shown inthe following table. The purchase price allocations were based upon the Company's best estimates of the fair values of the acquired assets and liabilities. Multifamily Communities acquired during the yearsended:(in thousands, except amortization period data) December 31, 2018 December 31, 2017 Land $28,365 $46,120Buildings and improvements 181,931 316,770Furniture, fixtures and equipment 44,474 75,169Lease intangibles 8,257 13,204Prepaids & other assets 569 1,277Accrued taxes (684) (1,076)Security deposits, prepaid rents, and other liabilities (494) (915) Net assets acquired $262,418 $450,549 Cash paid $87,592 $146,900Mortgage debt, net 174,826 303,649 Total consideration $262,418 $450,549 Year ended December 31, 2018: Revenue $11,533 $42,586Net income (loss) $(8,704) $(18,352) Year ended December 31, 2017: Revenue $— $18,795Net income (loss) $— $(13,483) Capitalized acquisition costs incurred by the Company $4,412 $5,732Acquisition costs paid to related party (included above) $2,615 $2,750Remaining amortization period of intangible assets and liabilities (months) 3.8 0.0Student housing properties acquiredDuring the years ended December 31, 2018 and 2017, the Company completed the acquisition of the following student housing properties:Acquisitiondate Property Location Units Beds 5/10/2018 The Tradition College Station, Texas 427 8085/31/2018 The Retreat at Orlando Orlando, Florida 221 8946/27/2018 The Bloc Lubbock, Texas 140 556 788 2,258 2/28/2017 Sol Tempe, Arizona 224 63910/27/2017 Stadium Village Atlanta, Georgia 198 79212/18/2017 Ursa Waco, Texas 250 840 672 2,271The aggregate purchase prices of the student housing acquisitions for the years ended December 31, 2018 and 2017 were approximately $197.0 million and$184.1 million, respectively, exclusive of acquired escrows, security deposits, prepaids, capitalized acquisition costs and other miscellaneous assets andassumed liabilities.102Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018The Company allocated the purchase prices and capitalized acquisition costs to the acquired assets and liabilities based upon their fair values, as shown inthe following table. The purchase price allocations were based upon the Company's best estimates of the fair values of the acquired assets and liabilities. Student housing properties acquired during theyears ended:(in thousands, except amortization period data) December 31, 2018 December 31, 2017 Land $23,149 $22,430Buildings and improvements 146,856 136,205Furniture, fixtures and equipment 27,211 16,424Lease intangibles 2,440 10,954Prepaids & other assets 309 559Accrued taxes (942) (72)Security deposits, prepaid rents, and other liabilities (720) (717) Net assets acquired $198,303 $185,783 Cash paid $92,212 $69,898Mortgage debt, net 106,091 115,885 Total consideration $198,303 $185,783 Year ended December 31, 2018: Revenue $9,882 $17,230Net income (loss) $(7,797) $(12,474) Year ended December 31, 2017: Revenue $— $5,953Net income (loss) $— $(5,228) Capitalized acquisition costs incurred by the Company $2,555 $1,888Acquisition costs paid to related party (included above) $1,970 $1,348 Remaining amortization period of intangible assets and liabilities (months) 1.5 0.0103Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018New Market Properties assets acquiredDuring the years ended December 31, 2018 and 2017, the Company completed the acquisition of the following grocery-anchored shopping centers:Acquisitiondate Property Location Gross leasablearea (square feet) 4/27/2018 Greensboro Village Nashville, Tennessee 70,2034/27/2018 Governors Towne Square Atlanta, Georgia 68,6586/26/2018 Neapolitan Way Naples, Florida 137,5806/29/2018 Conway Plaza Orlando, Florida 117,7057/6/2018 Brawley Commons Charlotte, North Carolina 122,02812/21/2018 Hollymead Town Center Charlottesville, Virginia 158,807 674,981 4/21/2017 Castleberry-Southard Atlanta, Georgia 80,0186/6/2017 Rockbridge Village Atlanta, Georgia 102,4327/26/2017 Irmo Station Columbia, South Carolina 99,3848/25/2017 Maynard Crossing Raleigh, North Carolina 122,7819/8/2017 Woodmont Village Atlanta, Georgia 85,6399/22/2017 West Town Market Charlotte, North Carolina 67,88311/30/2017 Roswell Wieuca Shopping Center Atlanta, Georgia 74,37012/5/2017 Crossroads Market Naples, Florida 126,895 759,402 The aggregate purchase prices of the New Market Properties acquisitions for the years ended December 31, 2018 and 2017 were approximately $158.6million and $173.4 million, respectively, exclusive of acquired escrows, security deposits, prepaids, capitalized acquisition costs and other miscellaneousassets and assumed liabilities.104Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018The Company allocated the purchase prices to the acquired assets and liabilities based upon their fair values, as shown in the following table. The purchaseprice allocation was based upon the Company's best estimates of the fair values of the acquired assets and liabilities. New Market Properties' acquisitions duringthe years ended:(in thousands, except amortization period data) December 31, 2018 December 31, 2017 Land $40,793 $39,771Buildings and improvements 99,967 124,627Tenant improvements 5,862 3,324In-place leases 11,394 11,110Above market leases 3,279 533Leasing costs 3,855 3,688Below market leases (4,934) (8,243)Other assets 247 179Security deposits, prepaid rents, and other (1,024) (860) Net assets acquired $159,439 $174,129 Cash paid $83,906 $49,693Mortgage debt 75,533 124,436 Total consideration $159,439 $174,129 Year ended December 31, 2018: Revenue $5,670 $16,193Net income (loss) $(1,057) $(1,399) Year ended December 31, 2017: Revenue $— $4,637Net income (loss) $— $(674) Capitalized acquisition costs incurred by the Company $2,320 $2,023Capitalized acquisition costs paid to related party (included above) $1,631 $1,411Remaining amortization period of intangible assets and liabilities (years) 6.5 8.4 Preferred Office Properties assets acquiredOn December 20, 2018, the Company acquired Capitol Towers, a pair of office buildings comprised of approximately 479,000 square feet of office space inCharlotte, North Carolina.On July 31, 2018, the Company acquired 150 Fayetteville, an office building comprised of approximately 560,000 square feet of office space in Raleigh,North Carolina.On January 29, 2018, the Company acquired Armour Yards, a collection of four adaptive re-use office buildings comprised of approximately 187,000 squarefeet of office space in Atlanta, Georgia.The aggregate purchase price of the Preferred Office Properties acquisitions for the year ended December 31, 2018 was approximately $448.3 million,exclusive of acquired escrows, security deposits, prepaids, capitalized acquisition costs and other miscellaneous assets and assumed liabilities.For the year ended December 31, 2017, the Company acquired Westridge, an office building comprised of 258,000 square feet of office space in San Antonio,Texas.105Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018The Company allocated the purchase price and capitalized acquisition costs to the acquired assets and liabilities based upon their fair values, as shown in thefollowing table. The purchase price allocations were based upon the Company's best estimates of the fair values of the acquired assets and liabilities. Preferred Office Properties' acquisitions during the yearsended December 31,(in thousands, except amortization period data) 2018 2017 Land $36,274 $15,778Buildings and improvements 336,944 55,631Tenant improvements 32,085 2,864In-place leases 25,275 10,023Above-market leases 4,900 —Leasing costs 19,817 5,712Below-market leases (10,626) (5,328)Prepaid and other assets 1,588 799Accrued taxes (17) (99)Security deposits, prepaid rents, and other liabilities (12,241) — Net assets acquired $433,999 $85,380 Cash paid $152,949 $30,940Mortgage debt, net 281,050 54,440 Total consideration $433,999 $85,380 Year ended December 31, 2018: Revenue $12,327 $10,069Net income (loss) $(2,337) $859 Year ended December 31, 2017: Revenue $— $1,294Net income (loss) $— $111 Capitalized acquisition costs incurred by the Company $6,013 $943Acquisition costs paid to related party (included above) $4,483 $843Remaining amortization period of intangible assets and liabilities (years) 9.3 8.1The Company recorded aggregate amortization and depreciation expense of: Year ended December 31,(in thousands) 2018 2017 2016Depreciation: Buildings and improvements $78,691 $55,803 $35,427Furniture, fixtures, and equipment 47,158 30,215 20,989 125,849 86,018 56,416Amortization: Acquired intangible assets 44,617 30,492 21,416Deferred leasing costs 519 201 284Website development costs 151 66 24Total depreciation and amortization $171,136 $116,777 $78,140At December 31, 2018, the Company had recorded acquired gross intangible assets of $249.2 million, and accumulated amortization of $113.2 million, grossintangible liabilities of $62.4 million and accumulated amortization of $15.3 million. Net intangible assets and liabilities as of December 31, 2018 will beamortized over weighted average remaining amortization periods of approximately 7.9 years and 9.2 years, respectively.106Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018At December 31, 2018, the Company had restricted cash of approximately $14.7 million that was contractually restricted to fund capital expenditures andother property-level commitments such as tenant improvements and leasing commissions.Purchase OptionsIn the course of extending real estate loan investments for property development, the Company will often receive an exclusive option to purchase theproperty once development and stabilization are complete. If the Company determines that it does not wish to acquire the property, it has the right to sell itspurchase option back to the borrower for a termination fee in the amount of the purchase option discount.On May 7, 2018, the Company terminated its existing purchase options on the Encore, Bishop Street and Hidden River multifamily communities and theHaven 46 and Haven Charlotte student housing properties, all of which are partially supported by real estate loan investments held by the Company. Inexchange, the Company received net termination fees aggregating approximately $10.7 million from the developers. These fees are treated as additionalinterest 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 estateloans. The Company recorded approximately $8.7 million of interest revenue related to these transactions for the year ended December 31, 2018.4. Agency Mortgage-Backed SecuritiesOn December 14, 2018, the Company invested in Agency Mortgage-Backed Securities representing undivided (or “pass-through”) beneficial interests inspecified pools of fixed-rate mortgage loans, which are classified as trading securities. The principal balance of the pools with associated premium amountstotaled $41.1 million. On December 20, 2018, the Company sold its entire position and in doing so, recorded a gain on the sale of these trading investmentsof approximately $61,500. Additionally, for the year ended December 31, 2018, the Company recorded approximately $197,000 in interest income. AtDecember 31, 2018, the Company held a receivable related to this sale transaction of $41.2 million, which was collected upon the unsettlement of thetransaction in January, 2019.5. Real Estate Loans, Notes Receivable, and Line of CreditOur portfolio of fixed rate, interest-only real estate loans consisted of:(Dollars in thousands) December 31, 2018 December 31, 2017Number of loans 19 23Drawn amount $336,329 $388,506Deferred loan origination fees (2,118) (1,710)Loan loss allowance — —Carrying value $334,211 $386,796 Unfunded loan commitments $164,913 $67,063Weighted average current interest, per annum(paid monthly) 8.47% 8.53%Weighted average accrued interest, per annum 5.34% 4.99%107Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018(In thousands) Principal balance Deferred loanorigination fees Loan lossallowance CarryingvalueBalances as of December 31, 2017 $388,506 $(1,710) $— $386,796Loan fundings 200,806 — — 200,806Loan repayments (145,533) — — (145,533)Loans settled with property acquisitions (102,950) — — (102,950)Loan origination fees collected — (1,979) — (1,979)Amortization of loan origination fees — 1,571 — 1,571Reduction of principal due to troubleddebt restructuring (1,967) — — (1,967)Increase in loan loss allowances — — (2,533) (2,533)Application of loan loss allowances due toloan repayment (2,533) — 2,533 —Balances as of December 31, 2018 $336,329 $(2,118) $— $334,211Property type Number of loans Carryingvalue Commitmentamount Percentage ofportfolio(Dollars in thousands) Multifamily communities 13 $264,498 $352,575 79%Student housing properties 4 56,856 68,231 17%New Market Properties 1 12,857 12,857 4%Preferred Office Properties 1 — 67,579 —%Balances as of December 31, 2018 19 $334,211 $501,242 The Company's Palisades real estate loan investment is subject to a loan participation agreement an with unaffiliated third party, under which the syndicate isto fund approximately 25% of the loan commitment amount and collectively receive approximately 25% of interest payments, returns of principal andpurchase option discount (if applicable). At December 31, 2018, the aggregate amount of the Company's liability under the loan participant agreement wasapproximately $5.2 million.The Company's real estate loan investments are collateralized by 100% of the membership interests of the underlying project entity, and, where considerednecessary, by unconditional joint and several repayment guaranties and performance guaranties by the principal(s) of the borrowers. These guarantiesgenerally 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 pursuantto a standard intercreditor agreement. Prepayment of the real estate loans are permitted in whole, but not in part, without the Company's consent.Management monitors the credit quality of the obligors under each of the Company's real estate loans by tracking the timeliness of scheduled interest andprincipal 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. Inaddition, management monitors the actual progress of development and construction relative to the construction plan, as well as local, regional and nationaleconomic conditions that may bear on our current and target markets. The credit quality of the Company’s borrowers is primarily based on their paymenthistory on an individual loan basis, and the Company assigns risk ratings to its real estate loans and notes receivable in credit quality categories as describedin Note 2.Effective as of July 1, 2018, the Company ceased accruing interest on its real estate loan investment in partial support of the Fusion Apartments multifamilycommunity project located in Irvine, California. This restructuring of the loan terms reduced the overall interest rate on the loan from 16.0% to 8.5%,necessitating the application of troubled debt restructuring accounting guidance. The loan was placed in a non-accrual status, whereby interest is no longeraccrued on the loan and any subsequent payments received are recorded as reductions in loan principal. The total principal reduction of the loan totaledapproximately $2.0 million. In addition, the Company recorded an approximate $2.5 million allowance for loss on its real estate loan which is reflected on itsstatements of operations. On November 7, 2018, the principal balance and accrued interest (net of the $4.5 million reduction) was repaid.108Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018The Company continues to monitor each loan and note receivable for potential deterioration of risk ratings and can make no assurances that economic orindustry conditions or other circumstances will not lead to future loan loss allowances.Of the principal amount outstanding of the Company's real estate loan investments as of December 31, 2018, approximately $244.6 million were rated with acredit quality indicator of A, $57.9 million were rated with a credit quality indicator of B, $33.8 million were rated with a credit quality indicator of C and$0.0 million was rated with a credit quality indicator of D.At December 31, 2018, our portfolio of notes and lines of credit receivable consisted of:Borrower Date of loan Maturitydate Total loancommitments Outstanding balance as of: Interestrate December 31,2018 December31, 2017 (Dollars in thousands) 360 Residential, LLC 3/20/2013 (1) $— $— $2,000 12% Preferred Capital Marketing Services, LLC (3) 1/24/2013 12/31/2019 1,500 763 926 10% Preferred Apartment Advisors, LLC (2,3,4) 8/21/2012 12/31/2019 18,000 9,778 14,488 6%(7) Haven Campus Communities, LLC (2,3, 9) 6/11/2014 12/31/2018 11,660 11,620 7,325 8%(5) Oxford Capital Partners, LLC (2,6) 10/5/2015 6/30/2019 8,000 4,022 6,628 12% Newport Development Partners, LLC 6/17/2014 6/30/2019 2,000 — — 12% 360 Residential, LLC II 12/30/2015 (1) — — 3,255 15% Mulberry Development Group, LLC (2) 3/31/2016 6/30/2019 500 465 479 12% Mulberry Alexandria Group, LLC 7/31/2017 (1) — — 1,921 12% 360 Capital Company, LLC (2) 5/24/2016 12/31/2019 3,400 3,100 3,041 12% 360 Capital Company, LLC (2,8) 7/24/2018 12/31/2020 8,000 6,923 — 8.5% Haven Campus Communities CharlotteMember, LLC (2,3,11) 8/31/2018 12/22/2019 10,942 10,788 — 15%(10) Unamortized loan fees (152) (6) $64,002 $47,307 $40,057 (1) The amount payable under the note was repaid in 2018.(2) The amounts payable under the terms of these revolving credit lines are collateralized by a personal guaranty of repayment by the principals ofthe borrower.(3) See related party disclosure in Note 7.(4) The amounts payable under this revolving credit line were collateralized by an assignment of the Manager's rights to fees due under the SixthAmended and Restated Management Agreement between the Company and the Manager, or the Management Agreement.(5) Effective January 1, 2018, the interest rate was lowered from 12.0% per annum to 8.0% per annum.(6) 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 collateralizedby a personal guaranty of repayment by the principals of the borrower.(7) Effective January 1, 2018, the interest rate was lowered from 8.0% per annum to 6.0% per annum.(8) The amount payable under the note is collateralized by the developer's interest in the Fort Myers multifamily community project and a personalguaranty of repayment by the principals of the borrower.(9) The amount payable under this note is collateralized by one of the principals of the borrower's 49.49% interest in an unrelated shopping centerlocated in Atlanta, Georgia and a personal guaranty of repayment by the principals of the borrower.(10) The interest payable consists of 8.5% payable monthly and an additional 6.5% accrued due at maturity.(11) The amount payable under this note is collateralized by one of the principals of the borrower's 49.51% interest in an unrelated shopping centerlocated in Atlanta, Georgia and a personal guaranty of repayment by one of the principals of the borrower.Due to events in the fourth quarter of 2018, two lines of credit were in default. The Haven Campus Communities, LLC line of credit matured on December 31,2018 and the outstanding principal and interest was not repaid in full before December 31, 2018. The Haven Campus Communities Charlotte Member, LLCline of credit was also in default due to non-payment of a mandatory contractual pay-down. Consistent with the Company’s policy, such loans were classifiedas a “C” as part of the Company’s surveillance review process. In addition to existing personal guarantees from both principal holders of the Haven CampusCommunities, LLC line of109Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018credit, the Company obtained a pledge of 49.49% interest in an unrelated shopping center located in Atlanta, Georgia as additional collateral. Further, for theHaven Campus Communities Charlotte Member, LLC line of credit, the Company obtained a separate 49.51% interest in the same shopping center, inaddition to an existing personal guaranty from one of the principal holders of the note. After an analysis of all collateral, the Company determined that thefair value of the collateral provided the Company sufficient protection to satisfy the obligations and no allowance was required. The Company is pursuing alloptions in order to protect its interests in the notes. The total exposure for the two notes is approximately $22.6 million. Management will continue tomonitor these notes in the process of collecting on the outstanding principal and interest due under each.The Company recorded interest income and other revenue from these instruments as follows:Interest income Year ended December 31,(in thousands) 2018 2017 2016Real estate loans: Current interest payments $31,368 $32,570 $23,633Additional accrued interest 19,067 18,670 14,860Origination fee amortization 1,570 1,376 872Purchase option termination fee amortization 9,820 — — Total real estate loan revenue 61,825 52,616 39,365Interest income on notes and lines of credit 3,784 4,286 4,121 Interest income on loans and notes receivable $65,609 $56,902 $43,486The Company extends loans for purposes such as to partially finance the development of multifamily residential communities, to acquire land in anticipationof developing and constructing multifamily residential communities, and for other real estate or real estate related projects. Certain of these loans includecharacteristics such as exclusive options to purchase the project within a specific time window following project completion and stabilization, thesufficiency of the borrowers' investment at risk and the existence of payment and performance guaranties provided by the borrowers, any of which can causethe loans to create variable interests to the Company and require further evaluation as to whether the variable interest creates a VIE, which would necessitateconsolidation of the project.The Company considers the facts and circumstances pertinent to each entity borrowing under the loan, including the relative amount of financing theCompany is contributing to the overall project cost, decision making rights or control held by the Company, guarantees provided by third parties, and rightsto expected residual gains or obligations to absorb expected residual losses that could be significant from the project. If the Company is deemed to be theprimary beneficiary of a VIE, consolidation treatment would be required.The Company has no decision making authority or power to direct activity, except normal lender rights, which are subordinate to the senior loans on theprojects. The Company has concluded that it is not the primary beneficiary of the borrowing entities and therefore it has not consolidated these entities in itsconsolidated financial statements. The Company's maximum exposure to loss from these loans is their drawn amount as of December 31, 2018 ofapproximately $336.3 million. The maximum aggregate amount of loans to be funded as of December 31, 2018 was approximately $501.2 million, whichincludes approximately $164.9 million of loan committed amounts not yet funded.The Company has evaluated its real estate loans, where appropriate, for accounting treatment as loans versus real estate development projects, as required byASC 310. For each loan, the characteristics and the facts and circumstances indicate that loan accounting treatment is appropriate.The Company is also subject to a geographic concentration of risk that could be considered significant with regard to the Bishop Street, DawsonvilleMarketplace, 360 Forsyth, Morosgo, Morosgo Capital, Solis Kennesaw, Solis Kennesaw Capital, Solis Kennesaw II, 8West and 8West construction loans, allof which are partially supporting various real estate projects in or near Atlanta, Georgia. The drawn amount of these loans as of December 31, 2018 totaledapproximately $84.6 million (with a total commitment amount of approximately $167.8 million) and in the event of a total failure to perform by theborrowers and guarantors, would subject the Company to a total possible loss of the drawn amount.110Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018Subordinate mortgage pool investmentOn May 23, 2018, the Company purchased a subordinate tranche of Series 2018-ML04, a pool of 20 multifamily mortgages with a total pool size ofapproximately $276.3 million, from Freddie Mac. The purchase price of the subordinate tranche was approximately $4.7 million and has a weighted averagematurity of approximately 16 years, at which time the Company will collect the face value of its tranche of $27.6 million. The yield to maturity of thesubordinate tranche is expected to be approximately 11.5% per annum.The Company has evaluated the structure of the investment under the VIE rules and has determined that, due to the Company's position as directingcertificate holder of 2018-ML04, it is in the position most able to influence the financial performance of the trust. As the subordinate tranche holder, theCompany also holds the first loss position of 2018-ML04. As such, the Company is deemed to be the primary beneficiary of the VIE and has consolidated theassets, liabilities, revenues, expenses and cash flows of the entire trust in its consolidated financial statements as of and for the periods ended December 31,2018. The Company's maximum exposure to loss from 2018-ML04 is approximately $5.1 million. The Company has no recourse liability to either thecreditors or other beneficial interest holders of 2018-ML04.6. Redeemable Preferred Stock and Equity OfferingsAt December 31, 2018, the Company's active equity offerings consisted of:•an offering of a maximum of 1,500,000 Units, with each Unit consisting of one share of Series A Redeemable Preferred Stock and one Warrant topurchase up to 20 shares of Common Stock (the "$1.5 Billion Unit Offering");•an offering of up to a maximum of 500,000 shares of Series M Redeemable Preferred Stock (“mShares”), par value $0.01 per share (the “mSharesOffering”); and•an offering of up to $300 million of equity or debt securities (the "Shelf Offering"), including an offering of up to $150 million of Common Stockfrom time to time in an "at the market" offering (the "2016 ATM Offering").Certain offering costs are not related to specific closing transactions and are recognized as a reduction of stockholders' equity in the proportion of the numberof instruments issued to the maximum number of Units anticipated to be issued. Any offering costs not yet reclassified as reductions of stockholders' equityare are reflected in the asset section of the consolidated balance sheets as deferred offering costs.As of December 31, 2018, cumulative gross proceeds and offering costs for our active equity offerings consisted of:(In thousands) Deferred Offering Costs Offering Totaloffering Grossproceeds asof December31, 2018 Reclassified asreductions ofstockholders' equity Recorded asdeferredassets Total Specificallyidentifiableoffering costs(2) Totalofferingcosts$1.5 Billion UnitOffering $1,500,000 $684,652 $3,39355% $2,802 $6,195 $64,709 $70,904mSharesOffering 500,000 44,226 1,27435% 2,326 3,600 1,964 5,564Shelf Offering 300,000(1) 98,080 68333% 1,340 2,023 3,001 5,024 Total $2,300,000 $826,958 $5,350 $6,468 $11,818 $69,674 $81,492(1) Included in the $300 million Shelf Offering is a total of $150 million allocated for the 2016 ATM Offering, which is not listed separately.(2) These offering costs specifically identifiable to Unit offering closing transactions, such as commissions, dealer manager fees, and other registration fees, are reflected asa reduction of stockholders' equity at the time of closing.Aggregate offering expenses of the $1.5 Billion Unit Offering, including selling commissions and dealer manager fees, and of the mShares Offering,including dealer manager fees, are each individually capped at 11.5% of the aggregate gross proceeds of the two offerings, of which the Company willreimburse its Manager up to 1.5% of the gross proceeds of such offerings for all111Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018organization and offering expenses incurred, excluding selling commissions and dealer manager fees for the $1.5 Billion Unit Offering and excluding dealermanager fees for the mShares Offering; however, upon approval by the conflicts committee of the board of directors, the Company may reimburse its Managerfor any such expenses incurred above the 1.5% amount as permitted by the Financial Industry Regulatory Authority, or FINRA.7. Related Party TransactionsOn April 16, 2018, John A. Williams, the Company's Chief Executive Officer and Chairman of the Board, passed away. The Company's Haven 12, and HavenCharlotte real estate loan investments and the Haven Campus Communities' lines of credit are supported in part by guaranties of repayment and performanceby John A. Williams, Jr., John A. Williams' son. Because the terms of these loans were negotiated and agreed upon while John A. Williams was the ChiefExecutive Officer of the Company, these instruments will continue to be reported as related party transactions until the loans are repaid. The Company namedDaniel M. DuPree as Chairman of the Board of Directors and Chief Executive Officer of the Company. Leonard A. Silverstein was named Vice Chairman ofthe Board of Directors and continues as the Company's President and Chief Operating Officer.As of December 31, 2018, Mr. Silverstein is an executive officer and Messrs. DuPree and Silverstein are also directors of NELL Partners, Inc., which controlsthe Manager. Mr. DuPree is the Chief Executive Officer and Mr. Silverstein is the President and Chief Operating Officer of the Manager.The Company's Wiregrass and Wiregrass Capital real estate loan investments are partially financing the development of a multifamily community in Tampa,Florida. Timothy A. Peterson is a member of management of both the Altman Companies as well as Chairman of the Audit Committee of the Company'sBoard of Directors. The Wiregrass loans therefore qualify as related party transactions.112Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018The Management Agreement entitles the Manager to receive compensation for various services it performs related to acquiring assets and managingproperties on the Company's behalf:(In thousands) Year ended December 31,Type ofCompensation Basis of Compensation 2018 2017 2016 Acquisition fees As of July 1, 2017, 1.0% of the gross purchaseprice of real estate assets $10,699 $6,131 $—Loan originationfees 1.0% of the maximum commitment of any realestate loan, note or line of credit receivable 2,166 1,331 1,886Loancoordination fees 1.6% of any assumed, new or supplemental debtincurred in connection with an acquiredproperty. Effective July 1, 2017, the fee wasreduced to 0.6% of any such debt 3,897 5,560 10,560Assetmanagement fees Monthly fee equal to one-twelfth of 0.50% ofthe total book value of assets, as adjusted 14,698 12,908 8,603Propertymanagement fees Monthly fee up to 4% of the monthly grossrevenues of the properties managed 8,934 6,382 4,944General andadministrativeexpense fees Monthly fee equal to 2% of the monthly grossrevenues of the Company 6,022 5,238 3,483Constructionmanagement fees Quarterly fee for property renovation andtakeover projects 408 332 174Disposition fees 1% of the sale price of a real estate asset 1,710 — —Waived assetmanagement fees/ general andadministrativefees Recognized upon disposition of the propertywhen exceeding the 7% IRR hurdle 671 — — $49,205 $37,882 $29,650The Manager may, in its discretion, waive some or all of the asset management, property management, or general and administrative fees in the current periodfor properties owned by the Company. The waived fees may become earned by the Manager only in the event of a sales transaction, and whereby theCompany’s capital contributions for the property being sold exceed a 7% annual rate of return. The Company will recognize in future periods to the extent, ifany, it determines that the sales transaction is probable, and that the estimated net sale proceeds would exceed the annual rate of return hurdle. A cumulativetotal of approximately $12.7 million of combined asset management and general and administrative fees related to acquired properties as of December 31,2018 have been waived by the Manager. A total of $11.2 million remaining waived fees could possibly be earned by the Manager in the future.As of July 1, 2017, the Manager reduced the loan coordination fee from 1.6% to 0.6% of the amount of assumed, new or incremental debt which leveragesacquired real estate assets. In addition, the Manager reinstated a 1% acquisition fee charged on the cost of acquired real estate assets, which had historicallybeen charged prior to its replacement effective January 1, 2016 by the 1.6% loan coordination fee. These changes were put in place to reflect a shift in theefforts of the Manager in property acquisitions.113Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018In addition to property management fees, the Company incurred the following reimbursable on-site personnel salary and related benefits expenses at theproperties, which are listed on the Consolidated Statements of Operations:(in thousands) Year ended December 31,2018 2017 2016$16,276 $12,329 $10,399The Manager utilizes its own and its affiliates' personnel to accomplish certain tasks related to raising capital that would typically be performed by thirdparties, including, but not limited to, legal and marketing functions. As permitted under the Management Agreement, the Manager was reimbursed $477,076,$429,094 and $461,294 for the years ended December 31, 2018, 2017 and 2016, respectively and Preferred Capital Securities, LLC, or PCS, was reimbursed$1,412,522, $1,083,160 and $1,019,353 for the years ended December 31, 2018, 2017 and 2016, respectively. These costs are recorded as deferred offeringcosts until such time as additional closings occur on the $1.5 Billion Unit Offering, mShares Offering or the Shelf Offering, at which time they are reclassifiedon a pro-rata basis as a reduction of offering proceeds within stockholders’ equity.The Manager also receives leasing commission fees. Retail leasing commission fees (a) for new retail leases are equal to the greater of (i) $4.00 per squarefoot, and (ii) 4.0% of the aggregate base rental payments to be made by the tenant for the first 10 years of the original lease term; and (b) for lease renewals areequal to the greater of (i) $2.00 per square foot, and (ii) 2.0% of the aggregate base rental payments to be made by the tenant for the first 10 years of the newlyrenewed lease term. There are no commissions payable on retail lease renewals thereafter. Office leasing commission fees (a) for new office leases are equal to50.0% of the first month’s gross rent plus 2.0% of the remaining fixed gross rent on the guaranteed lease term, (b) in the event of co-broker participation in anew lease, the leasing commission determined for a new lease are equal to 150.0% of the first month’s gross rent plus 6% of the remaining fixed gross rent ofthe guaranteed lease term, and (c) for lease renewals, are equal to 2% of the fixed gross rent of the guaranteed lease term or, in the event of a co-broker, 6% ofthe fixed gross rent of the guaranteed lease term. Office leasing commission fees may not exceed market rates for office leasing services.The Company holds a promissory note in the amount of approximately $763,000 due from Preferred Capital Marketing Services, LLC, or PCMS, which is awholly-owned subsidiary of NELL Partners.The Company has extended a revolving line of credit with a maximum borrowing amount of $18.0 million to its Manager.8. Dividends and DistributionsThe Company declares and pays monthly cash dividend distributions on its Series A Preferred Stock in the amount of $5.00 per share per month andbeginning in March 2017, on its Series M Preferred Stock, on an escalating scale of $4.79 per month in year one, increasing to $6.25 per month in year eightand beyond. All preferred stock dividends are prorated for partial months at issuance as necessary. The Company declared aggregate quarterly cash dividendson its Common Stock of $1.02 and $0.94 per share for the years ended December 31, 2018 and 2017, respectively. The holders of Class A OP Units of theOperating Partnership are entitled to equivalent distributions as the dividends declared on the Common Stock. At December 31, 2018, the Company had877,454 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 years ended December 31, 2018 2017(in thousands) Series A Preferred Stock $84,841 $63,176mShares 1,900 475Common Stock 41,129 31,244Class A OP Units 1,041 843 Total $128,911 $95,738114Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 20189. Equity CompensationStock Incentive PlanOn February 25, 2011, the Company’s board of directors adopted, and the Company’s stockholders approved, the Preferred Apartment Communities, Inc.2011 Stock Incentive Plan to incentivize, compensate and retain eligible officers, consultants, and non-employee directors. On May 7, 2015, the Company'sstockholders approved the third amendment to the Preferred Apartment Communities, Inc. 2011 Stock Incentive Plan, or, as amended, the 2011 Plan, whichamendment increased the aggregate number of shares of Common Stock authorized for issuance under the 2011 Plan from 1,317,500 to 2,617,500 andextended the expiration date of the 2011 Plan to December 31, 2019.Equity compensation expense by award type for the Company was: Year ended December 31, Unamortizedexpense as ofDecember 31,(in thousands) 2018 2017 2016 2018 Quarterly board member committee fee grants $— $— $84 $—Class B Unit awards: Executive officers - 2015 — — 5 —Executive officers - 2016 271 312 2,055 2Executive officers - 2017 344 2,691 — 326Executive officers - 2018 551 — — 591Restricted stock grants: 2015 — — 107 —2016 — 136 273 —2017 120 240 — —2018 241 — — 120Restricted stock units: 2017 76 91 — 782018 100 — — 205 Total $1,703 $3,470 $2,524 $1,322Restricted Stock GrantsThe following annual grants of restricted stock were made to members of the Company's independent directors, as payment of the annual retainer fees. Therestricted stock grants for the 2016, 2017 and 2018 service years vested (or are scheduled to vest) on a pro-rata basis over the four consecutive 90-day periodsfollowing the date of grant.Service year Shares Fair value pershare Totalcompensationcost (inthousands)2016 30,990 $13.23 $4102017 24,408 $14.75 $3602018 24,810 $14.51 $360115Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018Class B OP UnitsOn January 4, 2016, the Company caused the Operating Partnership to grant 265,931 Class B Units of the Operating Partnership, or Class B OP units, forservice to be rendered during 2016, 2017 and 2018. On January 3, 2017, the Company caused the Operating Partnership to grant 286,392 Class B OP Units,for service to be rendered during 2017, 2018 and 2019. On January 2, 2018, the Company caused the Operating Partnership to grant 256,087 Class B OPUnits, for service to be rendered during 2018, 2019 and 2020.On January 2, 2018, John A. Williams, the late Chief Executive Officer of the Company, was granted 53,746 Class B OP Units. On April 16, 2018, Mr.Williams passed away and his granted Class B OP Units were modified on a pro-rata basis as of the date of his death. Of the 53,746 Class B OP Units grantedto Mr. Williams, 38,284 Class B OP Units with a total fair value of approximately $638,000 were forfeited. The remaining 15,462 Class B OP Units becamevested Class B Units on January 2, 2019, and remained subject to the earning provision of all Class B OP Unit grants in order to convert to Class A OP Units.An additional 156,306 Class B OP Units granted to individuals other than Mr. Williams with an aggregate fair value of $2.6 million were forfeited during theyear ended December 31, 2018.Because of the market condition vesting requirement that determines the transition of the vested Class B OP Units to earned Class B OP Units, a Monte Carlosimulation was utilized to calculate the total fair values, which will be amortized as compensation expense over the periods beginning on the grant datesthrough the Initial Valuation Dates. On January 3, 2017, all of the 265,931 Class B OP Units granted on January 3, 2016 became earned and 206,534automatically vested and converted to Class A OP Units. Of the remaining earned Class B OP Units, 29,699 vested and automatically converted to Class A OPUnits on January 2, 2018 and the final 29,698 earned Class B OP Units vested and automatically converted to Class A OP Units on January 2, 2019. OnJanuary 2, 2018, all of the 286,392 Class B OP Units granted on January 2, 2017 became earned and 227,599 automatically became vested and converted toClass A Units. Of the remaining earned Class B OP Units, 27,131 vested and automatically converted to Class A OP Units on January 2, 2019 and the final27,122 earned Class B OP Units will vest and automatically convert to Class A OP Units on January 2, 2020, assuming each grantee fulfills the requisiteservice requirement.The underlying valuation assumptions and results for the Class B OP Unit awards were:Grant dates 1/2/2018 1/3/2017Stock price $20.19 $14.79Dividend yield 4.95% 5.95%Expected volatility 25.70% 26.40%Risk-free interest rate 2.71% 2.91% Number of Units granted: One year vesting period 171,988 198,184Three year vesting period 84,099 88,208 256,087 286,392 Calculated fair value per Unit $16.66 $11.92 Total fair value of Units $4,266,409 $3,413,793 Target market threshold increase $5,660,580 $4,598,624The expected dividend yield assumptions were derived from the Company’s closing prices of the Common Stock on the grant dates and the projected futurequarterly dividend payments per share of $0.22 for the 2017 awards and $0.25 for the 2018 awards.For the 2017 and 2018 awards, the Company's own stock price history was utilized as the basis for deriving the expected volatility assumption.The risk-free rate assumptions were obtained from the Federal Reserve yield table and were calculated as the interpolated rate between the 20 and 30 yearyield percentages on U. S. Treasury securities on the grant dates.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 tothe initial valuation date. 116Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018Restricted Stock UnitsOn January 3, 2017, the Company caused the Operating Partnership to grant 26,900 restricted stock units, or RSUs to certain employees of affiliates of theCompany, for service to be rendered during 2017, 2018 and 2019. On January 2, 2018, the Company caused the Operating Partnership to grant 20,720restricted stock units, or RSUs, for service to be rendered during 2018, 2019 and 2020.The RSUs vest in three equal consecutive one-year tranches from the date of grant. For each grant, on the Initial Valuation Date, the market capitalization ofthe 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 theInitial Valuation Date. If the market capitalization measure results in an increase which exceeds the target market threshold, the Vested RSUs become earnedRSUs and automatically convert into Common Stock on a one-to-one basis. Vested RSUs may become Earned RSUs on a pro-rata basis should the result ofthe market capitalization test be an increase of less than the target market threshold. Any Vested RSUs that do not become Earned RSUs on the InitialValuation Date are subsequently remeasured on a quarterly basis until such time as all Vested RSUs become Earned RSUs or are forfeited due to terminationof 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 servicethrough the final valuation date is required for the Vested RSUs to qualify to become fully Earned RSUs.Because RSUs are valued using the identical market condition vesting requirement that determines the transition of the Vested Class B Units to Earned ClassB Units, the same valuation assumptions and Monte Carlo result of $16.66 and $11.92 per RSU were utilized to calculate the total fair values of the RSUs of$345,195 and $320,648 for the 2018 and 2017 grants, respectively. The total fair value amounts pertaining to grants of RSUs, net of forfeitures, are amortizedas compensation expense over the three one-year periods ending on the three successive anniversaries of the grant dates. As of December 31, 2018, a total of6,344 RSUs have been forfeited from the 2017 grant and a total of 2,400 RSUs have been forfeited from the 2018 grant.117Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 201810. IndebtednessMortgage Notes PayableMortgage Financing of Property AcquisitionsThe Company partially financed the real estate properties acquired during the year ended December 31, 2018 with mortgage debt as shown in the followingtable:Property Date Initial principalamount(in thousands) Fixed/Variablerate Rate MaturitydateLux at Sorrel 1/9/2018 $31,525 Fixed 3.91% 2/1/2030Armour Yards 1/29/2018 40,000 Fixed 4.10% 2/1/2028Green Park 2/28/2018 39,750 Fixed 4.09% 3/10/2028Anderson Central (1) 3/16/2018 12,000 Fixed 4.32% 4/1/2028The Tradition 5/10/2018 30,000 400 + LIBOR 6.50% 6/6/2021Greensboro Village 5/22/2018 8,550 Fixed 4.20% 6/1/2028Governors Towne Square 5/22/2018 11,375 Fixed 4.20% 6/1/2028Retreat at Orlando (2) 5/31/2018 47,125 Fixed 4.09% 9/1/2025The Bloc 6/27/2018 28,966 355 + LIBOR 6.05% 7/9/2021Conway Plaza 6/29/2018 9,783 Fixed 4.29% 7/5/2028Brawley Commons 7/6/2018 18,525 Fixed 4.36% 8/1/2028150 Fayetteville 7/31/2018 114,400 Fixed 4.27% 8/10/2028Lodge at Hidden River 9/27/2018 41,685 Fixed 4.32% 10/1/2028Vestavia Reserve 11/9/2018 37,726 Fixed 4.40% 12/1/2030CityPark View South 11/15/2018 24,140 Fixed 4.51% 6/1/2029Capitol Towers 12/20/2018 126,650 Fixed 4.60% 1/10/2037Hollymead 12/21/2018 27,300 Fixed 4.64% 1/1/2029 $649,500 (1) Anderson Central was acquired in 2016 and subsequent financing was obtained in March 2018.(2) The mortgage for the Retreat at Orlando was assumed at acquisition.Repayments and RefinancingsThe sale of Stoneridge Farms at the Hunt Club on October 23, 2018 resulted in $233,000 of debt defeasance related costs, which were netted against the gainon the sale of the property.The sale of McNeil Ranch on December 11, 2018 resulted in $147,000 of debt defeasance related costs, which were netted against the gain on the sale of theproperty.The sale of Stone Rise on September 28, 2018 resulted in $71,500 of debt defeasance related costs, which were netted against the gain on the sale of theproperty.The sale of Lake Cameron on March 20, 2018 resulted in $402,000 of debt defeasance related costs, which were netted against the gain on the sale of theproperty.118Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018The sale of Sandstone Creek on January 20, 2017, resulted in $1.4 million of debt defeasance related costs. The sale of Ashford Park on March 7, 2017,resulted in $1.1 million of debt defeasance related costs plus a prepayment premium of approximately $0.4 million, which were netted against the gain on thesale of the property.On March 29, 2018, the Company refinanced the mortgage on its Sol student housing property. A short-term bridge loan was used to replace the mortgagebeing held on the Acquisition Facility. The mortgage principal balance of approximately $37.5 million remained the same under the new financingarrangement, and the existing variable interest rate increased 10 basis points, to 210 basis points over LIBOR. As a result of the refinance, the Companyincurred expenses of approximately $41,000, which are included within the Interest Expense line of the Consolidated Statements of Operations.On October 31, 2018, the Company refinanced the mortgage on its Sol student housing property out of the short-term bridge loan. The mortgageprincipal balance was reduced from approximately $37.5 million to approximately $36.2 million, and the existing variable interest rate of 210 basis pointsover LIBOR was converted to a fixed rate of 4.71%. As a result of the refinance, the Company incurred expenses of approximately $97,000, which areincluded within the Interest Expense line of the Consolidated Statements of Operations.The following table summarizes our mortgage notes payable at December 31, 2018:(dollars in thousands) Fixed rate mortgage debt: Principalbalances due Weighted-averageinterest rate Weightedaverageremaining life(years)Multifamily communities $1,031,601 3.90% 9.6New Market Properties 426,724 3.94% 7.2Preferred Office Properties 486,734 4.32% 15.1Student housing properties 161,421 4.13% 6.6 Total fixed rate mortgage debt 2,106,480 4.02% 10.2 Variable rate mortgage debt: Multifamily communities 81,279 4.39% 4.9New Market Properties 61,627 4.97% 2.6Preferred Office Properties — — 0.0Student housing properties 90,366 6.01% 2.0 Total variable rate mortgage debt 233,272 5.17% 3.2 Total mortgage debt: Multifamily communities 1,112,880 3.93% 9.3New Market Properties 488,351 4.07% 6.6Preferred Office Properties 486,734 4.32% 15.1Student housing properties 251,787 4.81% 4.9 Total principal amount 2,339,752 4.14% 9.5Deferred loan costs (35,242) Mark to market loan adjustment (4,885) Mortgage notes payable, net $2,299,625 The Company has placed interest rate caps on the variable rate mortgages on its Avenues at Creekside and Citi Lakes multifamily communities. Underguidance provided by ASC 815-10, these interest rate caps fall under the definition of derivatives, which are embedded in their debt hosts. Because theseinterest rate caps are deemed to be clearly and closely related to their debt hosts, bifurcation and fair value accounting treatment is not required.119Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018The mortgage note secured by our Independence Square property is a seven year term with an anticipated repayment date of September 1, 2022. If theCompany elects not to pay its principal balance at the anticipated repayment date, the term will be extended for an additional five years, maturing onSeptember 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 basispoints or (ii) the yield on the seven year U.S. treasury security rate plus approximately 400 basis points.The mortgage note secured by our Royal Lakes Marketplace property has a maximum commitment of approximately $11.1 million. As of December 31,2018, the Company has an outstanding principal balance of $9.5 million on this loan. Additional advances of the mortgage commitment will be drawn as theCompany achieves incremental leasing benchmarks specified under the loan agreement. This mortgage has a variable interest of 1 Month LIBORplus 250 basis points, which was 4.85% as of December 31, 2018.The mortgage note secured by our Champions Village property has a maximum commitment of approximately $34.2 million. As of December 31, 2018, theCompany has an outstanding principal balance of $27.4 million. Additional advances of the mortgage commitment may be drawn as the Company achievesleasing activity, if elected by the Company. Additional advances are available through October 2019. This mortgage note has a variable interest of thegreater of (i) 3.25% or (ii) the sum of the 3.00% plus the LIBOR Rate, which was 5.35% as of December 31, 2018.As of December 31, 2018, the weighted-average remaining life of deferred loan costs related to the Company's mortgage indebtedness was approximately 9.7years. Our mortgage notes have maturity dates between May 1, 2019 and June 1, 2054. Credit FacilityThe Company has a credit facility, or Credit Facility, with KeyBank National Association, or KeyBank, which defines a revolving line of credit, or RevolvingLine of Credit, which is used to fund investments, capital expenditures, dividends (with consent of KeyBank), working capital and other general corporatepurposes on an as needed basis. On March 23, 2018, the maximum borrowing capacity on the Revolving Line of Credit was increased to $200 millionpursuant to an accordion feature. The accordion feature permits the maximum borrowing capacity to be expanded or contracted without amending any furtherterms of the instrument. On December 12, 2018, the Fourth Amended and Restated Credit Agreement, or the Amended and Restated Credit Agreement, wasamended to extend the maturity to December 12, 2021, with an option to extend the maturity date to December 12, 2022, subject to certain conditionsdescribed therein. The Revolving Line of Credit accrues interest at a variable rate of one month LIBOR plus an applicable margin of 2.75% to 3.50% perannum, depending upon the Company’s leverage ratio. The weighted average interest rate for the Revolving Line of Credit was 5.23% for the year endedDecember 31, 2018. The Amended and Restated Credit Agreement also reduced the commitment fee on the average daily unused portion of the RevolvingLine of Credit to 0.25% or 0.30% per annum, depending upon the Company’s outstanding Credit Facility balance.On May 26, 2016, the Company entered into a $11.0 million interim term loan with KeyBank, or the Interim Term Loan, to partially finance the acquisitionof Anderson Central, a grocery-anchored shopping center located in Anderson, South Carolina. The Interim Term Loan accrued interest at a rate of LIBORplus 2.5% per annum until it was repaid and extinguished during the first quarter of 2018.The Fourth Amended and Restated Credit Agreement contains certain affirmative and negative covenants, including negative covenants that limit or restrictsecured and unsecured indebtedness, mergers and fundamental changes, investments and acquisitions, liens and encumbrances, dividends, transactions withaffiliates, burdensome agreements, changes in fiscal year and other matters customarily restricted in such agreements. The amount of dividends that may bepaid out by the Company is restricted to a maximum of 95% of AFFO for the trailing rolling four quarters without the lender's consent; solely for purposes ofthis covenant, AFFO is calculated as earnings before interest, taxes, depreciation and amortization expense, plus reserves for capital expenditures, lessnormally recurring capital expenditures, less consolidated interest expense.120Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018As of December 31, 2018, the Company was in compliance with all covenants related to the Revolving Line of Credit, as shown in the following table:Covenant (1) Requirement ResultNet worth Minimum $1.5 billion(2) $1.6 billionDebt yield Minimum 8.25% 9.66%Payout ratio Maximum 95%(3) 87.2%Total leverage ratio Maximum 65% 59.4%Debt service coverage ratio Minimum 1.50x 1.94x(1) All covenants are as defined in the credit agreement for the Revolving Line of Credit.(2) Minimum of $686.9 million plus 75% of the net proceeds of any equity offering, which totaled approximately $822.2 million as ofDecember 31, 2018.(3) Calculated on a trailing four-quarter basis. For the year ended December 31, 2018, the maximum dividends and distributions allowedunder this covenant was approximately $140.4 million.Loan fees and closing costs for the establishment and subsequent amendments of the Credit Facility are amortized utilizing the straight line method over thelife of the Credit Facility. At December 31, 2018, unamortized loan fees and closing costs for the Credit Facility were approximately $1.7 million, which willbe amortized over a remaining loan life of approximately 3.0 years. Loan fees and closing costs for the mortgage debt on the Company's properties areamortized utilizing the effective interest rate method over the lives of the loans.Acquisition FacilityOn February 28, 2017, the Company entered into a credit agreement, or Acquisition Credit Agreement, with Freddie Mac through KeyBank to obtain anacquisition revolving credit facility, or Acquisition Facility, with a maximum borrowing capacity of $200 million. The purpose of the Acquisition Facility isto finance acquisitions of multifamily communities and student housing communities. The maximum borrowing capacity on the Acquisition Facility may beincreased at the Company's request up to $300 million at any time prior to March 1, 2021. The Acquisition Facility accrues interest at a variable rate of onemonth 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 debtservice coverage ratio. The Acquisition Facility has a maturity date of March 1, 2022 and has two one-year extension options, subject to certain conditionsdescribed therein. At December 31, 2018, unamortized loan fees and closing costs for the establishment of the Acquisition Facility were approximately $0.2million, which will be amortized over a remaining loan life of approximately 3.3 years. Interest ExpenseInterest expense, including amortization of deferred loan costs was: Year ended December 31,(in thousands) 2018 2017 2016 Multifamily communities $45,662 $35,402 $28,136New Market Properties 19,188 14,895 8,870Preferred Office Properties 12,789 7,006 474Student housing properties 11,217 3,085 894Interest paid to real estate loan participants 2,430 2,295 2,009 Total 91,286 62,683 40,383 Credit Facility and Acquisition Facility 4,278 4,785 3,901Interest Expense $95,564 $67,468 $44,284121Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018Future Principal PaymentsThe Company’s estimated future principal payments due on its debt instruments as of December 31, 2018 were:Period Future principalpayments(in thousands) 2019 $180,943(1) 2020 79,556 2021 199,025 2022 215,173 2023 191,286 thereafter 1,530,769 Total $2,396,752 (1) Includes the principal amount of $57.0 million dueon the Company's Revolving Line of Credit.11. Income TaxesThe 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 federaland 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 inaccordance with GAAP and determined without regard for the deduction for dividends paid and excluding net capital gains) to its stockholders. For theCompany'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 statetax assets totaling approximately $298,100, none of which were based upon tax positions deemed to be uncertain. These deferred tax assets will most likelynot be used since the Company elected REIT status; therefore, management has determined that a 100% valuation allowance is appropriate as ofDecember 31, 2018 and December 31, 2017.The income tax characterization of the Company's dividend distributions were as follows: 2018 2017 2016Preferred Stock: Ordinary income 51.4% 64.0% 88.1%Return of capital —% 27.5% 10.5%Capital gains 48.6% 8.5% 1.4% Common Stock: Ordinary income 27.0% —% —%Return of capital 47.4% 100.0% 100.0%Capital gains 25.6% —% —%12. Commitments and ContingenciesOn March 28, 2014, the Company entered into a payment guaranty in support of its Manager's eleven-year office lease, which began on October 9, 2014. Asof December 31, 2018, the amount guarantied by the Company was $5.6 million and is reduced by $619,304 per lease year over the term of the lease.Certain officers and employees of the Manager have been assigned company credit cards. As of December 31, 2018, the Company guarantied up to $640,000on these credit cards.The Company is otherwise currently subject to neither any known material commitments or contingencies from its business operations, nor any materialknown or threatened litigation.122Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.A total of approximately $12.7 million of asset management and general and administrative fees related to acquired properties as of December 31, 2018 havebeen waived by the Manager. The waived fees are converted at the time of waiver into contingent fees, which are earned by the Manager as an additionaldisposition fee only in the event of a sales transaction, and whereby the Company’s capital contributions for the property being sold exceed a 7% annual rateof return. The Company will recognize in future periods to the extent, if any, it determines that the sales transaction is probable, and that the estimated netsale proceeds would exceed the annual rate of return hurdle. As of December 31, 2018, a total of $11.2 million remaining waived fees could possibly beearned by the Manager in the future. At December 31, 2018, the Company had unfunded balances on its real estate loan portfolio of approximately $164.9 million.At December 31, 2018, the Company had unfunded contractual commitments for tenant, leasing, and capital improvements of approximately $7.3 million.13. Operating LeasesThe Company’s grocery-anchored shopping centers and office properties are leased to tenants under operating leases for which the terms vary. The futureminimum rental income due under the remaining non-cancelable terms of the Company's operating leases in place, excluding tenant reimbursements ofoperating expenses and real estate taxes and additional percentage rent based on tenants’ sales volumes, as of December 31, 2018, is presented below,assuming that all leases which expire are not renewed and tenant renewal options are not exercised (excludes rental income due from tenants of multifamilycommunities, which are of lease terms of twelve months or less):For the year endingDecember 31: Future Minimum Rents(in thousands) New MarketProperties Preferred OfficeProperties Total 2019 $58,143 56,564 114,7072020 51,949 61,704 113,6532021 43,152 58,805 101,9572022 35,218 58,108 93,3262023 29,562 57,343 86,905Thereafter 79,747 298,469 378,216Total $297,771 $590,993 $888,764The Company’s grocery-anchored shopping centers are geographically concentrated within the Sunbelt and Mid-Atlantic region of the United States. TheCompany’s retail tenant base primarily consists of national and regional supermarkets, consumer services, healthcare providers, and restaurants. Our groceryanchor tenants comprise approximately 50.5% of our gross leasable area. Our credit risk, therefore, is concentrated in the retail/grocery real estate sector.Amounts required as security deposits vary depending upon the terms of the respective leases and the creditworthiness of the tenant, with the exception ofour grocer anchor tenants, who generally are not required to provide security deposits. Exposure to credit risk is limited to the extent that tenant receivablesexceed security deposits. Security deposits related to tenant leases are included in security deposits and other liabilities in the accompanying consolidatedbalance sheets.As of December 31, 2018 the Company’s approximately 2.6 million square foot office portfolio was 93% leased to a predominantly investment grade credit(or investment grade equivalent) tenant roster. For non-credit tenants, our leases typically require a security deposit or letter of credit, which limits worst casecollection exposure to amounts in excess of those protections. Additionally, some credit tenant leases will include credit enhancement provisions that requirea security deposit or letter of credit in the event of a rating downgrade. We conduct thorough credit analyses not only for leasing activities within ourexisting portfolio but also for major tenants in properties we are considering acquiring.14. Segment InformationThe Company's Chief Operating Decision Maker, or CODM, evaluates the performance of the Company's business operations and allocates financial andother resources by assessing the financial results and outlook for future performance across five distinct segments: multifamily communities, student housingproperties, real estate related financing, New Market Properties and Preferred Office Properties.Multifamily Communities - consists of the Company's portfolio of owned residential multifamily communities123Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018Student Housing Properties - consists of the Company's portfolio of owned student housing properties.Financing - consists of the Company's portfolio of real estate loans, bridge loans, and other instruments deployed by the Company to partiallyfinance the development, construction, and prestabilization carrying costs of new multifamily communities and other real estate and real estaterelated assets, as well as the Company's investment in the Series 2018-ML04 mortgage-backed pool. Excluded from the financing segment arefinancial results of the Company's Dawson Marketplace grocery-anchored shopping center real estate loan, which are included in the New MarketProperties segment.New Market Properties - consists of the Company's portfolio of grocery-anchored shopping centers, which are owned by New Market Properties,LLC, a wholly-owned subsidiary of the Company, as well as the financial results from the Company's grocery-anchored shopping center real estateloans.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 isdefined as rental and other property revenue from real estate assets plus interest income from its loan portfolio less total property operating and maintenanceexpenses, property management fees, real estate taxes, property insurance, and general and administrative expenses. The CODM uses NOI as a measure ofoperating performance because it provides a measure of the core operations, rather than factoring in depreciation and amortization, financing costs,acquisition expenses, and other expenses generally incurred at the corporate level. The following tables present the Company's assets, revenues, and NOI results by reportable segment, as well as a reconciliation from NOI to net income (loss).The assets attributable to 'Other' primarily consist of deferred offering costs recorded but not yet reclassified as reductions of stockholders' equity and cashbalances at the Company and Operating Partnership levels.Beginning June 30, 2018, the Company's student housing properties segment is presented separately because the assets of the student housing propertiessegment exceeded 10% of the Company's consolidated assets. Prior period data has been adjusted from that which was previously reported to reflect thisdevelopment. In prior periods, student housing properties and multifamily communities were combined.(in thousands) December 31, 2018 December 31, 2017 Assets: Multifamily communities $1,503,648 $1,410,187Student housing properties 411,102 227,198Financing 393,299 439,824New Market Properties 883,594 742,492Preferred Office Properties 884,649 413,666Other (including $269,946 and $0 of consolidated assets of VIE) 334,666 19,003Consolidated assets $4,410,958 $3,252,370 Total capitalized expenditures (inclusive of additions to construction in progress, but exclusive of the purchase price of acquisitions) for the years endedDecember 31, 2018, 2017 and 2016 were as follows: Year ended December 31,(in thousands) 2018 2017 2016 Capitalized expenditures: Multifamily communities $16,497 $10,972 $7,748Student housing properties 3,382 799 653New Market Properties 6,901 3,494 1,640Total $26,780 $15,265 $10,041124Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018Second-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 ownershipstandards (and which amounts were underwritten into the total investment at the time of acquisition), (iii) for property re-developments and repositioningsand (iv) for building improvements that are recoverable from future operating cost savings.Total revenues by reportable segment of the Company were: Year ended December 31,(in thousands)2018 2017 2016Revenues Rental revenues: Multifamily communities$147,073 $118,984 $105,546Student housing properties31,334 11,204 3,323New Market Properties56,654 43,168 26,313Preferred Office Properties (1)45,018 27,106 2,149Total rental revenues280,079 200,462 137,331 Other revenues: Multifamily communities15,970 13,078 11,617Student housing properties1,695 647 66New Market Properties20,589 15,482 9,178Preferred Office Properties15,144 9,192 209Total other revenues53,398 38,399 21,070 Financing revenues63,794 55,144 41,718Consolidated revenues$397,271 $294,005 $200,119 (1) Included in rental revenues for our Preferred Office Properties segment is the amortization of deferred revenuefor tenant-funded leasehold improvements from a major tenant in our Three Ravinia and Westridge officebuildings. As of December 31, 2018, the Company has deferred revenue in an aggregate amount of $47.0 millionin connection with such improvements. The remaining balance to be recognized is approximately $43.5 millionwhich is included in the deferred revenues line on the consolidated balance sheets at December 31, 2018. Thesetotal 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 $2.7 million and $0.9 million for the years endedDecember 31, 2018 and 2017.125Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018 Year ended December 31,(in thousands)2018 2017 2016Segment net operating income (Segment NOI) Multifamily communities$93,084 $73,439 $64,767Student housing properties16,151 6,100 1,752Financing63,795 55,144 41,718New Market Properties55,013 42,041 26,298Preferred Office Properties41,800 25,987 1,676 Consolidated segment net operating income269,843 202,711 136,211 Interest expense: Multifamily communities45,661 35,402 28,137Student housing properties11,217 3,085 894New Market Properties19,188 14,895 8,870Preferred Office Properties12,789 7,006 474Financing6,709 7,080 5,909Depreciation and amortization: Multifamily communities80,927 64,869 55,766Student housing properties25,179 8,348 1,899New Market Properties39,269 30,088 19,246Preferred Office Properties25,761 13,472 1,229Professional fees2,480 2,568 3,134Management fees, net of forfeitures20,885 18,497 12,051Loan loss allowance2,533 — —Acquisition costs— 14 8,547Equity compensation to directors and executives1,703 3,470 2,524Gain on sale of real estate(69,705) (37,635) (4,271)Gain on noncash net assets of consolidated VIEs(320) — —Loss on extinguishment of debt— 888 —Other1,029 1,997 1,645 Net income (loss)$44,538 $28,667 (9,843)126Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 201815. Income (Loss) Per ShareThe following is a reconciliation of weighted average basic and diluted shares outstanding used in the calculation of income (loss) per share of CommonStock: Year ended December 31, (in thousands, except per-share figures) 2018 2017 2016Numerator: Net income (loss) $44,538 $28,667 $(9,843) Consolidated net (income) loss attributable to non-controlling interests (1,071) (986) 310 Net income (loss) attributable to the Company 43,467 27,681 (9,533) Dividends declared to preferred stockholders (86,741) (63,651) (41,081) Earnings attributable to unvested restricted stock (16) (15) (16) Net loss attributable to common stockholders $(43,290) $(35,985) $(50,630)Denominator: Weighted average number of shares of Common Stock - basic 40,032 31,926 23,969 Effect of dilutive securities: (D) — — — Weighted average number of shares of Common Stock, basic and diluted 40,032 31,926 23,969 Net loss per share of Common Stock attributable to common stockholders, basic and diluted $(1.08) $(1.13) $(2.11)(A) The Company's outstanding Class A Units of the Operating Partnership (877 and 885 and 886 Units at December 31, 2018, 2017 and 2016, respectively) containrights 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 earningsper 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. TheCompany had 1,608 and 1,222 and 914 outstanding shares of Series A Preferred Stock at December 31, 2018, 2017 and 2016 respectively. The Company's shares ofSeries M preferred stock, or mShares, accrue dividends at an escalating rate of 5.75% in year one to 7.50% in year eight and thereafter. The Company had 44 and 15mShares outstanding at December 31, 2018 and 2017, respectively.(C) The Company's outstanding unvested restricted share awards (12 and 12 and 15 shares of Common Stock at December 31, 2018, 2017 and 2016, respectively) containnon-forfeitable rights to distributions or distribution equivalents. The impact of the unvested restricted share awards on earnings per share has been calculated using thetwo-class method whereby earnings are allocated to the unvested restricted share awards based on dividends declared and the unvested restricted shares' participationrights in undistributed earnings. Given the Company's unvested restricted share awards are defined as participating securities, the dividends declared for that period areadjusted 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 23,205 sharesof Common Stock; (ii) 150 Class B Units; (iii) 12 shares of unvested restricted common stock; and (iv) 31 outstanding Restricted Stock Units are excluded from thediluted shares calculations because the effect was antidilutive. Class A Units were excluded from the denominator because earnings were allocated to non-controllinginterests in the calculation of the numerator.127Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 201816. Selected Quarterly Financial Data (unaudited)Quarterly financial information was as follows:(in thousands, except per-share data)Three months ended: 3/31/2018 6/30/2018 9/30/2018 12/31/2018 Revenues$90,370 $96,389 $104,232 $106,280Operating income$14,877 $17,013 $15,275 $22,912Net (loss) income$14,263 $(5,278) $8,354 $27,199Net (loss) income attributable to common stockholders$(5,636) $(26,068) $(14,227) $2,641 Net (loss) income per share of Common Stock available to Common stockholders: Basic$(0.14) $0.66 $0.35 $0.06Diluted$(0.14) $0.66 $0.35 $0.06Weighted average shares outstanding: Basic39,098 39,383 40,300 41,320Diluted39,098 39,383 40,300 42,046(in thousands, except per-share data)Three months ended: 3/31/2017 6/30/2017 9/30/2017 12/31/2017 Revenues$66,561 $70,891 $74,900 $81,652Operating income$14,346 $13,676 $16,721 $14,641Net income (loss)$30,061 $3,304 $43 $(4,742)Net income (loss) attributable to common stockholders$14,675 $(12,033) $(16,384) $(22,243) Net income (loss) per share of Common Stock available to Common stockholders: Basic$0.54 $(0.40) $(0.49) $(0.60)Diluted$0.54 $(0.40) $(0.49) $(0.60)Weighted average shares outstanding: Basic26,936 29,894 33,540 37,205Diluted26,936 29,894 33,540 37,205 17. Fair Values of Financial InstrumentsFair 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. TheCompany’s cash equivalents, notes receivable, accounts receivable and payables and accrued expenses all approximate fair value due to their short termnature.The following tables provide estimated fair values of the Company’s financial instruments. The carrying values of the Company's real estate loans includeaccrued interest receivable from additional interest or exit fee provisions and are presented net of deferred loan fee revenue, where applicable.128Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018 As of December 31, 2018 Carrying value Fair value measurementsusing fair value hierarchy(in thousands) Fair Value Level 1 Level 2 Level 3Financial Assets: Real estate loans (1)$334,211 $366,328 $— $— $366,328Notes receivable and line of credit receivable47,307 47,307 — — 47,307 $381,518 $413,635 $— $— $413,635Financial Liabilities: Mortgage notes payable$2,339,752 $2,313,405 $— $— $2,313,405Revolving credit facility57,000 57,000 — — 57,000Loan participation obligations5,181 5,181 — — 5,181 $2,401,933 $2,375,586 $— $— $2,375,586 As of December 31, 2017 Carrying value Fair value measurementsusing fair value hierarchy(in thousands) Fair Value Level 1 Level 2 Level 3Financial Assets: Real estate loans (1)$386,796 $432,982 $— $— $432,982Notes receivable and line of creditreceivable40,057 40,057 — — 40,057 $426,853 $473,039 $— $— $473,039Financial Liabilities: Mortgage notes payable$1,806,901 1,806,024 $— $— $1,806,024Revolving credit facility41,800 41,800 — — 41,800Term loan11,000 11,000 — — 11,000Loan participation obligations13,986 14,308 — — 14,308 $1,873,687 $1,873,132 $— $— $1,873,132(1) The carrying value of real estate assets includes the Company's balance of the Palisades real estate loan investment, which includes the amounts funded byunrelated participants. The loan participation obligations are the amounts due to the participants under these arrangements. Accrued interest included in thecarrying values of the Company's loan participation obligations was approximately $0.9 million and $1.5 million at December 31, 2018 and December 31,2017, respectively.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 adiscounted cash flow model over the remaining terms of the notes until their maturity dates and utilizing discount rates believed to approximate the marketrisk factor for notes of similar type and duration. The fair values also contain a separately-calculated estimate of any applicable additional interest paymentdue the Company at the maturity date of the loan, based on the outstanding loan balances at December 31, 2018, discounted to the reporting date utilizing adiscount 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 thefixed 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 valueof the mortgages.129Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018The following table presents activity of the ML-04 VIE as of and for the year ended December 31, 2018: Assets Liabilities (in thousands)Multifamily mortgage loansheld in VIEs at fair value VIE liabilities, at fair value NetBalance as of December 31, 2017$— $— $—Initial consolidation of ML-04 trust:267,705 262,965 4,740Gains (losses) included in net income due to change in fairvalue of net assets of VIE:3,496 3,176 320Repayments of underlying mortgage principal amounts andrepayments to Class A holders(1,255) (1,255) —Balance as of December 31, 2018$269,946 $264,886 $5,060The following table presents the level 3 input used to calculate the fair value of the consolidated assets and liabilities of the ML-04 VIE: Fair value Valuationmethodology Unobservable inputAssets: Multifamily mortgage loans held in VIEs at fair value$269,946 Discounted cash flow Discount rate 4.7%Liabilities: VIE liabilities, at fair value$264,886 Discounted cash flow Discount rate 4.7%The following table presents the estimated fair values of the consolidated assets and liabilities from the ML-04 VIE, for which the Company has elected thefair value option. As of December 31, 2018 Carrying value Fair value measurementsusing fair value hierarchy(in thousands) Fair Value Level 1 Level 2 Level 3Financial Assets: VIE assets from mortgage-backed pool$269,946 $269,946 $— $— $269,946Financial Liabilities: VIE liabilities from mortgage-backed pool$264,886 $264,886 $— $— $264,886Disclosure guidance under GAAP requires the Company to determine whether the fair value of the financial assets or the fair value of the financial liabilitiesof the ML-04 trust is more observable. The VIE assets within the ML-04 Trust consist of mortgage loans which finance 20 multifamily communities. The fairvalue of the VIE assets within the level 3 hierarchy are comprised of the fair value of the mortgages as estimated by the Company, which were developedutilizing a discounted cash flow model over the remaining terms of the mortgages until their maturity dates and utilizing discount rates believed toapproximate the market risk factor for instruments of similar type and duration. The fair values of the notes are categorized within the level 3 hierarchy of fairvalue estimation as the discount rate primary input assumption is unobservable.18. Subsequent EventsBetween January 1, 2019 and February 15, 2019, the Company issued 60,775 Units under its $1.5 Billion Unit Offering and collected net proceeds ofapproximately $54.7 million after commissions and fees and issued 6,155 shares of Series M Preferred Stock under the mShares offering and collected netproceeds of approximately $6.0 million after commissions and fees.On January 17, 2019, we acquired Gayton Crossing, a grocery-anchored shopping center consisting of 158,316 square feet of gross leasable area inRichmond, Virginia.130Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Preferred Apartment Communities, Inc.Notes to Consolidated Financial Statements – (continued)December 31, 2018On February 21, 2019, our board of directors declared a quarterly dividend on our Common Stock of $0.26 per share, payable on April 15, 2019 tostockholders of record on March 15, 2019.131Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Item 16.Form 10-K Summary None. 132Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Schedule III Preferred Apartment Communities, Inc. Real Estate Investments and Accumulated Depreciation December 31, 2018 (Dollars in thousands) Initial Costs Gross Amount at Which Carried at Close ofPeriod Property name Location(MSA) Description RelatedEncum-brances Land Building andImprovements CostsCapitalizedSubsequenttoAcquisition Land Building andImprovements Total (1) AccumulatedDepreciation Year Constr-ucted/Renova-ted DateAcquired Deprec-iableLives -Years Summit Crossing Atlanta, GA Apartments $38,349 $3,450 $27,705 $1,722 $3,450 $29,426 $32,876 $(9,183) 2007 4/21/2011 5 - 40 Summit CrossingII Atlanta, GA Apartments 13,357 3,220 15,852 359 3,220 16,211 19,431 (3,907) 2013 12/31/2013 5 - 40 Vineyards Houston, TX Apartments 34,039 5,456 46,201 1,248 5,456 47,449 52,905 (7,878) 2003 9/26/2014 5 - 35 Avenues atCypress Houston, TX Apartments 21,198 3,242 30,093 410 3,242 30,503 33,745 (6,230) 2014 2/13/2015 5 - 40 Avenues atNorthpointe Houston, TX Apartments 26,899 3,921 37,203 617 3,921 37,820 41,741 (7,459) 2013 2/13/2015 5 - 40 Venue atLakewood Ranch Sarasota, FL Apartments 28,723 3,791 42,950 453 3,791 43,402 47,193 (6,903) 2015 5/21/2015 5 - 40 Aster at LelyResort Naples, FL Apartments 31,796 7,675 43,794 568 7,675 44,363 52,038 (7,314) 2015 6/24/2015 5 - 40 CityPark View Charlotte,NC Apartments 20,571 3,559 28,360 218 3,559 28,577 32,136 (5,267) 2014 6/30/2015 5 - 40 Avenues atCreekside San Antonio,TX Apartments 39,697 5,984 48,989 1,025 5,984 50,014 55,998 (8,155) 2013 7/31/2015 5 - 40 Citi Lakes Orlando, FL Apartments 41,582 5,558 56,828 781 5,558 57,608 63,166 (8,526) 2014 9/3/2015 5 - 40 Stone Creek Houston, TX Apartments 20,139 2,211 22,916 176 2,211 23,092 25,303 (2,641) 2009 11/12/2015 5 - 40 Regent at Lenox Nashville,TN Mixed use — 301 3,493 28 301 3,521 3,822 (478) 2009 12/21/2015 5 - 40 Retreat at Lenox Nashville,TN Apartments 17,465 2,965 24,211 238 2,965 24,449 27,414 (3,371) 2015 12/21/2015 5 - 40 Lenox VillageTown Center Nashville,TN Mixed use 29,274 4,612 39,911 1,251 4,612 41,162 45,774 (5,654) 2009 12/21/2015 5 - 40 Village atBaldwin Park Orlando, FL Apartments 71,453 17,403 90,464 5,261 17,403 95,726 113,129 (10,649) 2008 1/5/2016 5 - 37 Crosstown Walk Tampa, FL Apartments 30,878 5,178 39,332 388 5,178 39,721 44,899 (5,579) 2014 1/15/2016 5 - 49 Overton Rise Atlanta, GA Apartments 39,220 8,511 50,996 357 8,511 51,353 59,864 (5,543) 2015 2/1/2016 5 - 49 525 Avalon Park Orlando, FL Apartments 65,740 7,410 82,349 2,673 7,410 85,022 92,432 (9,947) 2008 5/31/2016 5 - 45 City Vista Pittsburgh,PA Apartments 34,387 4,082 41,486 300 4,082 41,786 45,868 (5,031) 2014 7/1/2016 5 - 49 Sorrel Jacksonville,FL Apartments 32,137 4,412 42,217 701 4,412 42,918 47,330 (4,927) 2015 8/24/2016 5 - 48 Citrus Village Tampa, FL Apartments 29,393 4,809 40,481 896 4,809 41,377 46,186 (3,771) 2011 03/03/17 5 - 44133Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (Dollars in thousands) Initial Costs Gross Amount at Which Carried at Close ofPeriod Property name Location(MSA) Description RelatedEncum-brances Land Building andImprovements CostsCapitalizedSubsequenttoAcquisition Land Building andImprovements Total (1) AccumulatedDepreciation Year Constr-ucted/Renova-ted DateAcquired Deprec-iableLives -Years Retreat atGreystone Birmingham,AL Apartments 34,644 4,077 44,462 617 4,077 45,078 49,155 (4,877) 2015 03/24/17 5 - 49 Founder'sVillage Williamsburg,VA Apartments 30,748 5,315 38,761 563 5,315 39,324 44,639 (3,360) 2014 03/31/17 5 - 47 ClaiborneCrossing Louisville,KY Apartments 26,381 2,147 37,579 957 2,147 38,536 40,683 (6,053) 2014 04/26/17 5 - 47 Luxe atLakewoodRanch Sarasota, FL Apartments 38,378 4,852 51,033 351 4,852 51,384 56,236 (3,520) 2016 07/26/17 5 - 48 AdaraOverland Park Kansas City,KS Apartments 31,203 2,854 42,030 263 2,854 42,293 45,147 (3,886) 2016 09/27/17 5 - 49 Reserve atSummitCrossing Atlanta, GA Apartments 19,654 4,375 25,939 147 4,375 26,086 30,461 (1,913) 2016 09/29/17 5 - 48 Aldridge atTown Village Atlanta, GA Apartments 37,221 7,122 45,418 215 7,122 45,633 52,755 (3,870) 2016 09/29/17 5 - 49 Overlook atCrosstownWalk Tampa, FL Apartments 21,848 3,309 28,014 89 3,309 28,103 31,412 (1,753) 2016 11/21/17 5 - 48 Colony atCenterpointe Richmond,VA Apartments 32,770 7,259 38,199 790 7,259 38,988 46,247 (2,333) 2016 12/20/17 5 - 48 Lux at Sorrel Jacksonville,FL Apartments 31,057 5,332 42,531 347 5,332 42,878 48,210 (2,232) 2017 1/9/2018 5 - 49 Green Park Atlanta, GA Apartments 39,236 7,478 49,211 235 7,478 49,446 56,924 (3,100) 2017 2/28/2018 5 - 48 Lodge atHidden River Tampa, FL Apartments 41,576 5,600 52,930 14 5,600 52,944 58,544 (764) 2017 9/27/2018 5 - 48 VestaviaReserve Birmingham,AL Apartments 37,726 4,140 54,206 51 4,140 54,257 58,397 (359) 2016 11/9/2018 5 - 48 CityParkView South Charlotte, NC Apartments 24,140 5,816 27,528 14 5,816 27,543 33,359 (208) 2017 11/15/2018 5 - 49 $1,112,879 $177,426 $1,433,672 $24,323 $177,426 $1,457,993 $1,635,419 $(166,641) WoodstockCrossing Atlanta, GA NeighborhoodRetail Center $2,935 $1,751 $3,800 $610 $1,751 $4,410 6,161 $(936) 1994 2/12/2014 5 - 30 Spring HillPlaza Nashville,TN NeighborhoodRetail Center 9,261 4,376 8,104 55 4,376 8,159 12,535 (1,961) 2005 9/5/2014 5 - 40 134Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (Dollars in thousands) Initial Costs Gross Amount at Which Carried at Close ofPeriod Property name Location(MSA) Description RelatedEncum-brances Land Building andImprovements CostsCapitalizedSubsequenttoAcquisition Land Building andImprovements Total (1) AccumulatedDepreciation Year Constr-ucted/Renova-ted DateAcquired Deprec-iableLives -Years Parkway TownCentre Nashville, TN NeighborhoodRetail Center 6,735 3,054 6,694 545 3,054 7,239 10,293 (1,188) 2005 9/5/2014 5 - 40 Barclay Crossing Tampa, FL NeighborhoodRetail Center 6,229 2,856 7,572 244 2,856 7,816 10,672 (1,284) 1998 9/30/2014 5 - 30 DeltonaLandings Orlando, FL NeighborhoodRetail Center 6,622 2,256 8,344 156 2,256 8,500 10,756 (1,399) 1999 9/30/2014 5 - 30 Kingwood Glen Houston, TX NeighborhoodRetail Center 11,079 5,021 12,930 444 5,021 13,374 18,395 (2,246) 1998 9/30/2014 5 - 30 Parkway Centre Columbus, GA NeighborhoodRetail Center 4,338 2,071 4,516 318 2,071 4,834 6,905 (837) 1999 9/30/2014 5 - 30 Powder Springs Atlanta, GA NeighborhoodRetail Center 6,987 1,832 8,246 187 1,832 8,433 10,265 (1,462) 1999 9/30/2014 5 - 30 SweetgrassCorner Charleston, SC NeighborhoodRetail Center 7,555 3,076 12,670 135 3,076 12,805 15,881 (2,147) 1999 9/30/2014 5 - 30 The Market atSalem Cove Nashville, TN NeighborhoodRetail Center 9,253 2,427 10,272 65 2,427 10,337 12,764 (1,435) 2010 10/6/2014 5 - 40 IndependenceSquare Dallas, TX NeighborhoodRetail Center 11,716 4,115 13,690 1,481 4,115 15,171 19,286 (2,299) 1977 7/1/2015 5 - 30 Royal LakesMarketplace Atlanta, GA NeighborhoodRetail Center 9,544 4,874 10,439 252 4,924 10,641 15,565 (1,517) 2008 9/4/2015 5 - 30 Summit Point Atlanta, GA NeighborhoodRetail Center 11,858 7,064 11,430 189 7,064 11,619 18,683 (1,674) 2004 10/30/2015 5 - 30 The Overlook atHamilton Place Chattanooga,TN NeighborhoodRetail Center 19,913 6,787 25,244 478 6,787 25,722 32,509 (3,324) 1992 12/22/2015 5 - 30 Wade GreenVillage Atlanta, GA NeighborhoodRetail Center 7,815 1,840 8,410 411 1,840 8,821 10,661 (1,227) 1993 2/29/2016 5 - 35 AndersonCentral GreenvilleSpartanburg,SC NeighborhoodRetail Center 11,817 5,059 13,278 317 5,059 13,595 18,654 (1,993) 1999 4/29/2016 5 - 30 East GateShopping Center Augusta, GA NeighborhoodRetail Center 5,431 1,653 7,391 56 1,653 7,447 9,100 (862) 1995 4/29/2016 5 - 30 Fairview Market GreenvilleSpartanburg,SC NeighborhoodRetail Center — 1,353 5,179 618 1,353 5,797 7,150 (654) 1998 4/29/2016 5 - 30135Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (Dollars in thousands) Initial Costs Gross Amount at Which Carried at Close ofPeriod Property name Location(MSA) Description RelatedEncum-brances Land Building andImprovements CostsCapitalizedSubsequenttoAcquisition Land Building andImprovements Total (1) AccumulatedDepreciation Year Constr-ucted/Renova-ted DateAcquired Deprec-iableLives -Years Fury's Ferry Augusta,GA NeighborhoodRetail Center 6,273 2,084 8,107 158 2,084 8,265 10,349 (870) 1996 4/29/2016 5 - 35 RosewoodShopping Center Columbia,SC NeighborhoodRetail Center 4,214 1,671 5,347 97 1,671 5,444 7,115 (495) 2002 4/29/2016 5 - 40 Southgate Village Birmingham,AL NeighborhoodRetail Center 7,491 2,262 10,290 172 2,262 10,462 12,724 (1,072) 1988 4/29/2016 5 - 35 The Market atVictory Village Nashville,TN NeighborhoodRetail Center 9,066 2,271 12,275 74 2,271 12,349 14,620 (1,203) 2007 5/16/2016 5 - 40 Lakeland Plaza Atlanta, GA NeighborhoodRetail Center 28,256 7,079 33,087 196 7,079 33,283 40,362 (3,404) 1990 7/15/2016 5 - 35 Cherokee Plaza Atlanta, GA NeighborhoodRetail Center 24,683 8,392 32,249 319 8,392 32,568 40,960 (2,372) 1958 8/8/2016 5 - 35 Heritage Station Raleigh, NC NeighborhoodRetail Center 8,845 1,684 9,883 1,593 1,684 11,476 13,160 (894) 2004 8/8/2016 5 - 40 Oak Park Village SanAntonio, TX NeighborhoodRetail Center 9,128 5,745 10,779 139 5,745 10,918 16,663 (1,025) 1970 8/8/2016 5 - 40 Sandy PlainsExchange Atlanta, GA NeighborhoodRetail Center 8,940 4,788 9,309 173 4,788 9,482 14,270 (989) 1997 8/8/2016 5 - 32 Shoppes ofParkland Miami, FL NeighborhoodRetail Center 15,978 10,779 16,543 211 10,779 16,754 27,533 (2,026) 2000 8/8/2016 5 - 35 Thompson BridgeCommons Atlanta, GA NeighborhoodRetail Center 11,951 1,478 16,047 — 1,478 16,047 17,525 (1,227) 2001 8/8/2016 5 - 40 University Palms Orlando, FL NeighborhoodRetail Center 12,798 4,854 16,706 525 4,854 17,231 22,085 (1,468) 1993 8/8/2016 5 - 37 ChampionsVillage Houston,TX NeighborhoodRetail Center 27,400 12,813 33,399 1,634 12,813 35,033 47,846 (3,977) 1973 10/18/2016 5 - 40 Castleberry -Southard Atlanta, GA NeighborhoodRetail Center 11,175 3,024 14,142 134 3,024 14,276 17,300 (893) 2006 4/21/2017 5 - 39 RockbridgeVillage Atlanta, GA NeighborhoodRetail Center 13,875 3,141 15,944 389 3,141 16,333 19,474 (778) 2005 6/6/2017 5 - 40 Irmo Station Columbia,SC NeighborhoodRetail Center 10,307 3,602 11,859 65 3,602 11,924 15,526 (793) 1980 7/26/2017 5 - 33136Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (Dollars in thousands) Initial Costs Gross Amount at Which Carried at Close ofPeriod Property name Location(MSA) Description RelatedEncum-brances Land Building andImprovements CostsCapitalizedSubsequenttoAcquisition Land Building andImprovements Total (1) AccumulatedDepreciation Year Constr-ucted/Renova-ted DateAcquired Deprec-iableLives -Years MaynardCrossing Raleigh, NC NeighborhoodRetail Center 17,927 6,304 22,566 52 6,304 22,618 28,922 (1,522) 1996 8/25/2017 5 - 30 WoodmontVillage Atlanta, GA NeighborhoodRetail Center 8,535 2,713 10,030 293 2,713 10,323 13,036 (629) 2002 9/8/2017 5 - 30 West TownMarket Charlotte, NC NeighborhoodRetail Center 8,737 1,937 12,298 — 1,937 12,298 14,235 (584) 2004 9/22/2017 5 - 37 CrossoradsMarket Naples, FL NeighborhoodRetail Center 18,584 7,044 22,627 21 7,044 22,648 $29,692 (791) 1993 12/5/2017 5 - 40 Roswell WieucaShopping Center Atlanta, GA NeighborhoodRetail Center — 12,006 18,485 — 12,006 18,485 $30,491 (673) 2007 11/30/2017 5 - 40 GreensboroVillage Nashville, TN NeighborhoodRetail Center 8,452 3,134 10,771 — 3,134 10,771 $13,905 (395) 2005 4/27/2018 5 - 40 Governors TowneSquare Atlanta, GA NeighborhoodRetail Center 11,245 2,766 13,027 — 2,766 13,027 $15,793 (342) 2004 4/27/2018 5 - 40 Neopolitan Way Naples, FL NeighborhoodRetail Center — 14,401 20,524 108 14,401 20,632 $35,033 (584) 1985 6/26/2018 5 - 35 Conway Plaza Orlando, FL NeighborhoodRetail Center 9,716 4,202 9,782 11 4,202 9,793 $13,995 (369) 1966 6/29/2018 5 - 30 BrawleyCommons Charlotte, NC NeighborhoodRetail Center 18,387 8,786 18,716 140 8,786 18,856 $27,642 (438) 1997 7/6/2018 5 - 40 Hollymead TownCenter Charlottesville,VA NeighborhoodRetail Center 27,300 7,503 33,009 — 7,503 33,009 $40,512 (47) 2005 12/21/2018 5 - 40 $488,351 $207,928 $626,010 $13,065 $207,978 $639,025 $847,003 $(58,305) BrookwoodOffice Center Birmingham,AL Officebuilding $31,481 $1,745 $42,661 $189 $1,745 $42,850 $44,595 $(2,937) 2007 8/29/2016 5 - 50 Galleria 75 Atlanta, GA Officebuilding 5,540 15,156 1,512 311 15,156 1,823 16,979 (490) 1988 11/4/2016 5 - 25 Three Ravinia Atlanta, GA Officebuilding 115,500 9,785 154,023 54,716 11,083 207,440 218,523 (15,591) 1991 12/30/2016 7 - 39 Westridge San Antonio,TX Officebuilding 53,164 15,778 58,496 5,543 15,778 64,039 79,817 (2,613) 2016 11/13/2017 13 - 50 Armour Yards Atlanta, GA Officebuilding 40,000 6,756 54,534 100 6,756 54,633 61,389 (1,800) 2016 1/29/2018 9 - 50137Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (Dollars in thousands) Initial Costs Gross Amount at Which Carried at Close ofPeriod Property name Location(MSA) Description RelatedEncum-brances Land Building andImprovements CostsCapitalizedSubsequent toAcquisition Land Building andImprovements Total (1) AccumulatedDepreciation Year Constr-ucted/Renova-ted DateAcquired Deprec-iableLives -Years 150Fayetteville Raleigh, NC Officebuilding 114,400 16,072 140,467 1,628 16,072 142,095 158,167 (2,159) 1990 7/31/2018 8 - 50 CapitolTowers Charlotte,NC Officebuilding 126,650 13,445 174,029 669 13,445 174,698 188,143 (177) 2015 12/20/2018 7 - 50 $486,735 $78,737 $625,722 $63,156 $80,035 $687,578 $767,613 $(25,767) North byNorthwest Tallahassee,FL Studenthousing $32,004 $8,281 $36,980 $1,102 $8,281 $38,082 $46,363 $(4,075) 2012 06/01/16 5 - 46 SoL Tempe, AZ Studenthousing 36,197 7,441 43,830 892 7,441 44,722 52,163 (4,395) 2010 02/28/17 5 - 42 StadiumVillage Atlanta, GA Studenthousing 46,095 7,930 60,793 397 7,930 61,190 69,120 (3,586) 2015 10/27/17 5 - 48 Ursa Waco, TX Studenthousing 31,400 7,060 48,006 779 7,060 48,784 55,844 (2,475) 2016 12/18/17 5 - 49 The Tradition CollegeStation, TX Studenthousing 30,000 7,061 67,749 491 7,061 68,240 75,301 (2,338) 2017 05/10/18 5 - 44 The Retreat atOrlando Orlando, FL Studenthousing 47,125 12,317 68,977 1,040 12,317 70,017 82,334 (3,161) 2014 05/31/18 5 - 46 The Bloc Lubbock,TX Studenthousing 28,966 3,771 37,219 264 3,771 37,483 41,254 (1,299) 2017 06/27/18 5 - 47 $251,787 $53,861 $363,554 $4,965 $53,861 $368,518 $422,379 $(21,329) $2,339,752 $517,952 $3,048,958 $105,509 $519,300 $3,153,114 $3,672,414 $(272,042) (1) The aggregate cost for federal income tax purposes to the Company was approximately $3.5 billion at December 31, 2018.(2) The costs capitalized subsequent to acquisition amount includes approximately $6.9 million of assets which were written off in 2017 due to damages from Hurricane Harvey. (in thousands) For the years ended December 31, Real estate investments 2018 2017 2016 Balance at the beginning of the year $2,735,342 $1,965,487 $1,007,286 Acquisitions 1,003,791 855,115 988,071 Improvements 56,007 39,908 7,972 Construction in progress (123) 8,388 2,102 Write-off of assets no longer in service (438) (7,719) (560) Disposal of assets (121,864) (125,837) (39,384) Balance at the end of the year $3,672,715 $2,735,342 $1,965,487 Accumulated depreciation Balance at the beginning of the year $(172,756) $(103,815) $(53,995) Depreciation (a) (125,849) (86,018) (56,340) 138Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Write-off of assets no longer in service 438 2,185 560 Disposal of assets 26,125 14,892 5,960 Balance at the end of the year $(272,042) $(172,756) $(103,815) (a) Represents depreciation expense of real estate assets. Amounts exclude amortization of lease intangible assets. 139Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Schedule IV Preferred Apartment Communities, Inc. Mortgage Loans on Real Estate December 31, 2018 Description PropertyName Location (MSA) InterestRate MaturityDate Periodic PaymentTerms Prior Liens Face Amountof Mortgages(inthousands) CarryingAmount ofMortgages (inthousands) PrincipalAmount ofMortgagesSubject toDelinquentPrincipal orInterest Real EstateConstructionLoan onMultifamilyCommunity Palisades Northern VA 13.0% 5/17/2019 (2)8.0 / 5.0 $— $17,270 $17,132 $— Real EstateConstructionLoan onMultifamilyCommunity BishopStreet Atlanta, GA 15.0% 6/30/2019 (7)8.5 / 6.5 — 12,693 12,693 — Real EstateConstructionLoan onMultifamilyCommunity Park 35 onClairmont Birmingham, AL 10.5% 6/26/2019 (3)8.5 / 2.0 — 21,060 21,060 — Real EstateConstructionLoan onMultifamilyCommunity Wiregrass Tampa, FL 15.0% 5/15/2020 (7)8.5 / 6.5 — 14,976 14,136 — Real EstateConstructionLoan onMultifamilyCommunity WiregrassCapital Tampa, FL 15.0% 5/15/2020 (7)8.5 / 6.5 — 4,244 3,891 — Real EstateConstructionLoan onMultifamilyCommunity Berryessa San Jose, CA 14.5% 2/13/2021 (8)8.5 / 6.0 — 137,616 95,349 — Real EstateConstructionLoan onMultifamilyCommunity The Anson Nashville, TN 13.0% 11/24/2021 (10)8.5 / 4.5 — 6,240 — — Real EstateConstructionLoan onMultifamilyCommunity The Anson Nashville, TN 13.0% 11/24/2021 (10)8.5 / 4.5 — 5,659 3,160 — Real EstateConstructionLoan onMultifamilyCommunity Fort Myers Fort Myers, FL 14.0% 2/3/2021 (5)8.5 / 5.5 — 9,416 8,118 — Real EstateConstructionLoan onMultifamilyCommunity Fort MyersCapital Fort Myers, FL 14.0% 2/3/2021 (5)8.5 / 5.5 — 6,193 5,442 — Real EstateConstructionLoan onMultifamilyCommunity 360Forsyth Atlanta, GA 14.0% 7/11/2020 (5)8.5 / 5.5 — 22,412 19,742 — Real EstateConstructionLoan onMultifamilyCommunity Morosgo Atlanta, GA 14.0% 1/31/2021 (5)8.5 / 5.5 — 11,749 10,736 — Real EstateConstructionLoan onMultifamilyCommunity MorosgoCapital Atlanta, GA 14.0% 1/31/2021 (5)8.5 / 5.5 — 6,176 5,188 — Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Real EstateConstructionLoan onMultifamilyCommunity UniversityCityGateway Charlotte, NC 13.5% 8/15/2021 (4)8.5 / 5.0 — 10,336 10,335 — Real EstateConstructionLoan onMultifamilyCommunity UniversityCityGatewayCapital Charlotte, NC 13.5% 8/18/2021 (4)8.5 / 5.0 — 7,338 6,030 — 140Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Description Property Name Location(MSA) InterestRate MaturityDate Periodic PaymentTerms Prior Liens Face Amountof Mortgages(inthousands) CarryingAmount ofMortgages (inthousands) PrincipalAmount ofMortgagesSubject toDelinquentPrincipal orInterest Real EstateConstructionLoan onMultifamilyCommunity CameronPark Alexandria,VA 11.5% 10/11/2021 (1)8.5 / 3.0 — 21,340 17,050 — Real EstateConstructionLoan onMultifamilyCommunity CameronPark Alexandria,VA 11.5% 10/11/2021 (1)8.5 / 3.0 — 8,850 7,557 — Real EstateConstructionLoan onMultifamilyCommunity Southpoint Fredericksburg,VA 12.5% 2/28/2022 (9)8.5 / 4.0 — 7,348 896 — Real EstateConstructionLoan onMultifamilyCommunity Southpoint Fredericksburg,VA 12.5% 2/28/2022 (9)8.5 / 4.0 — 4,962 3,895 — Real EstateConstructionLoan onMultifamilyCommunity Duval Jacksonville,FL 12.0% 6/14/2022 (6)8.5 / 3.5 — 16,697 3,886 — Real EstateConstructionLoan on StudentHousingCommunity Haven 12 Starkville, MS 8.5% 11/30/2020 (11)8.5 / 0.0 — 6,116 6,116 — Real EstateConstructionLoan on StudentHousingCommunity HavenCharlotte Charlotte, NC 15.0% 12/22/2019 (7)8.5 / 6.5 — 19,582 19,462 — Real EstateConstructionLoan on StudentHousingCommunity HavenCharlotteMember Charlotte, NC 15.0% 12/22/2019 (7)8.5 / 6.5 — 8,201 8,201 — Real EstateConstructionLoan on StudentHousingCommunity SolisKennesaw Atlanta, GA 14.0% 9/26/2020 (5)8.5 / 5.5 — 12,359 11,343 — Real EstateConstructionLoan on StudentHousingCommunity SolisKennesawCapital Atlanta, GA 14.0% 10/1/2020 (5)8.5 / 5.5 — 8,360 7,786 — Real EstateConstructionLoan on StudentHousingCommunity SolisKennesaw II Atlanta, GA 12.5% 5/5/2022 (9)8.5 / 4.0 — 13,613 4,268 — Real EstateConstructionLoan on OfficeProperty 8 WestConstructionLoan Atlanta, GA 6.5% 11/29/2022 (12)6.5 / 0.0 — 37,250 — — Real EstateConstructionLoan on OfficeProperty 8 West Atlanta, GA 13.5% 11/29/2022 (4)8.5 / 5.0 — 30,329 — — Real EstateConstructionLoan on GroceryAnchoredShopping DawsonMarketplace Atlanta, GA 15.4% 9/24/2020 (13)8.5 / 6.9 — 12,857 12,857 — Total — 501,242 336,329 — Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Unamortizedloan originationfees — — (2,118) — Carrying amount $— $501,242 $334,211 $— (1) Fixed rate, interest only, 8.5% payable monthly and 3.0% accrued(2) Fixed rate, interest only, 8.0% payable monthly and 5.0% accrued(3) Fixed rate, interest only, 8.5% payable monthly and 2.0% accrued(4) Fixed rate, interest only, 8.5% payable monthly and 5.0% accrued141Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.(5) Fixed rate, interest only, 8.5% payable monthly and 5.5% accrued(6) Fixed rate, interest only, 8.5% payable monthly and 3.5% accrued(7) Fixed rate, interest only, 8.5% payable monthly and 6.5% accrued(8) Fixed rate, interest only, 8.5% payable monthly and 6.0% accrued(9) Fixed rate, interest only, 8.5% payable monthly and 4.0% accrued(10) Fixed rate, interest only, 8.5% payable monthly and 4.5% accrued(11) Fixed rate, interest only, 8.5% payable monthly and 0.0% accrued(12) Variable rate - LIBOR + 4.0%, interest only, 6.5% payable monthly and 0.0% accrued(13) Fixed rate, interest only, 8.5% payable monthly and 6.9% accrued. Effective January 1, 2018, the deferred interest rate increased to 6.9% perannum until the accumulated accrued interest balance reached $250, at which point the deferred interest rate reverts to 5.0%.Index to Exhibits The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K (and are numbered inaccordance with Item 601 of Regulation S-K): ExhibitNo. Reference Description3.1 (2) Articles of Amendment and Restatement of Preferred Apartment Communities, Inc.3.2 (33) Fourth Amended and Restated By-laws of Preferred Apartment Communities, Inc.4.1 (10) Sixth Amended and Restated Partnership Agreement, dated June 3, 2016, among PreferredApartment Communities, Inc., Preferred Apartment Advisors, LLC and the other limited partnersparty thereto4.2 (5) Articles Supplementary for the Series A Redeemable Preferred Stock4.3 (6) Articles Supplementary for the Series M Redeemable Preferred Stock4.4 (11) Articles Supplementary classifying an additional 900,000 shares of the Series A RedeemablePreferred Stock4.5 (8) Articles Supplementary classifying an additional 2,000,000 shares of the Series A RedeemablePreferred Stock4.6 (6) Form of mShares Subscription Agreement4.7 (13) Form of Series A Subscription Agreement4.8 (15) First Amendment to the Sixth Amended and Restated Partnership Agreement, dated as of January25, 2017, entered into by Preferred Apartment Communities, Inc.4.9 (16) Articles of Amendment Amending the Holder Redemption Options of the Company's Series ARedeemable Preferred Stock4.10 (24) Amended and Restated Warrant Agreement dated as of March 14, 2012 between PreferredApartment Communities, Inc. and Computershare Trust Company, N.A., as Warrant Agent4.11 (5) Form of Global Warrant Certificate4.12 (25) Second Amended and Restated Warrant Agreement between Preferred Apartment Communities,Inc. and Computershare Trust Company, N.A., as Warrant Agent dated as of October 11, 20134.13 (26) Warrant Agreement between Preferred Apartment Communities, Inc. and Computershare TrustCompany, N.A., as Warrant Agent dated as of February 23, 201710.1 (10) Sixth Amended and Restated Management Agreement, dated June 3, 2016, among PreferredApartment Communities, Inc., Preferred Apartment Communities Operating Partnership, L.P. andPreferred Apartment Advisors, LLC10.2 (19) First Amendment to the Sixth Amended and Restated Management Agreement, entered into as ofOctober 5, 2016, effective as of August 29, 2016, among Preferred Apartment Communities, Inc.,Preferred Apartment Communities Operating Partnership, L.P. and Preferred Apartment Advisors,LLC10.3 (29) Amendment No. 2 to the Sixth Amended and Restated Management Agreement, effective as ofJuly 1, 2017 and entered into as of August 31, 2017, among Preferred Apartment Communities,Inc., Preferred Apartment Communities Operating Partnership, L.P. and Preferred ApartmentAdvisors, LLC10.4 (34) Amendment No. 3 to the Sixth Amended and Restated Management Agreement, effective as ofJuly 1, 2017 and entered into as of August 31, 2017, among Preferred Apartment Communities,Inc., Preferred Apartment Communities Operating Partnership, L.P. and Preferred ApartmentAdvisors, LLC10.5 (2)*The Company’s 2011 Stock Incentive Plan10.6 (3) Trademark License and Assignment Agreement dated September 17, 2010, but effective as of July29, 2010, between Preferred Apartment Communities, Inc. and Preferred Apartment Advisors, LLC142Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.10.7 (2)*Form of Restricted Stock Agreement pursuant to the Preferred Apartment Communities, Inc. 2011Stock Incentive Plan10.8 (4) Form of Indemnification Agreement10.9 (5)*First Amendment to Preferred Apartment Communities, Inc. 2011 Stock Incentive Plan10.10 (20)*Form of Preferred Apartment Communities, Inc. 2016 Class B Unit Award Agreement (3 year)10.11 (22)*Form of Preferred Apartment Communities, Inc. 2017 Class B Unit Award Agreement (1 year)10.12 (22)*Form of Preferred Apartment Communities, Inc. 2017 Class B Unit Award Agreement (3 year)10.13 (28)*Form of Preferred Apartment Communities, Inc. 2018 Class B Unit Award Agreement (1 year)10.14 (28)*Form of Preferred Apartment Communities, Inc. 2018 Class B Unit Award Agreement (3 year)10.15 (7) Intellectual Property Assignment and License Agreement dated March 14, 2012 between PreferredApartment Advisors, LLC and Preferred Apartment Communities, Inc.10.16 (7) Trademark License Agreement dated March 14, 2012 between Preferred Apartment Advisors, LLCand Preferred Apartment Communities, Inc.10.17 (7) Trademark Assignment dated March 14, 2012 between Preferred Apartment Advisors, LLC andPreferred Apartment Communities, Inc.10.18 (12)*Second Amendment to 2011 Stock Incentive Plan10.19 (14) Capital On Demand Sales AgreementTM dated May 4, 2016 between Preferred ApartmentCommunities, Inc. and JonesTrading Institutional Services, LLC10.20 (14) Capital On Demand Sales AgreementTM dated May 4, 2016 between Preferred ApartmentCommunities, Inc. and FBR Capital Markets & Co.10.21 (14) Capital On Demand Sales AgreementTM dated May 4, 2016 between Preferred ApartmentCommunities, Inc. and Canaccord Genuity Inc10.22 (29) Form of Amendment No. 1, dated July 10, 2017, to Capital On Demand Sales AgreementTM, datedMay 4, 2016 between Preferred Apartment Communities, Inc., and each of JonesTradingInstitutional Services, LLC, FBR Capital Markets & Co., and Canaccord Genuity, Inc.10.23 (29) Capital On Demand Sales AgreementTM dated July 10, 2017 between Preferred ApartmentCommunities, Inc. and National Securities Corporation10.24 (29) Capital On Demand Sales AgreementTM dated July 10, 2017 between Preferred ApartmentCommunities, Inc. and D.A. Davidson & Co.10.25 (29) Capital On Demand Sales AgreementTM dated July 10, 2017 between Preferred ApartmentCommunities, Inc. and JMP Securities LLC10.26 (17) Fourth Amended and Restated Credit Agreement dated as of August 5, 2016 among PreferredApartment Communities, Inc., Preferred Apartment Communities Operating Partnership, L.P., thelenders party thereto and KeyBank National Association10.27 (17) Fourth Amended and Restated Pledge and Security Agreement dated as of August 5, 2016 amongPreferred Apartment Communities Operating Partnership, L.P., (the "Borrower"), each of thesubsidiaries of the Borrower party thereto and KeyBank National Association10.28 (17) Fourth Amended and Restated Guaranty dated as of August 5, 2016 by and among PreferredApartment Communities, Inc., each of the guarantors party thereto and KeyBank NationalAssociation10.29 (18) Form of Buy-Sell Agreement with KeyBank National Association10.30 (21)*Third Amendment to 2011 Stock Incentive Plan10.31 (30) Soliciting Dealer Agreement, dated April 5, 2017 between Preferred Capital Securities, LLC andInvestacorp, Inc.143Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.10.32 (31) Form of Credit Agreement among Preferred Apartment Communities, Inc., Borrower and FederalHome Loan Mortgage Corporation10.33 (32) Credit Agreement dated as of February 28, 2017 among Preferred Apartment Communities, Inc.,PCC Tempe, LLC and KeyBank National Association21 (1) Subsidiaries of Preferred Apartment Communities, Inc.23.1 (1) Consent of PricewaterhouseCoopers LLP31.1 (1) Certification of Daniel M. DuPree, Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2 (1) Certification of John A. Isakson, Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1 (1) Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2 (1) Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002101 (1) XBRL (eXtensible Business Reporting Language). The following materials for the period endedDecember 31, 2017, formatted in XBRL: (i) Consolidated balance sheets at December 31, 2017and December 31, 2016, (ii) consolidated statements of operations for the years ended December31, 2017, December 31, 2016 and December 31, 2015, (iii) consolidated statements of equity andaccumulated deficit, (iv) consolidated statements of cash flows and (v) notes to consolidatedfinancial statements. *Management contract or compensatory plan, contract or arrangement. (1)Filed herewith (2)Previously filed with the Pre-effective Amendment No. 6 to Form S-11 Registration Statement(Registration No. 333-168407) filed by the Registrant with the Securities and ExchangeCommission on March 4, 2011 (3)Previously filed with the Pre-effective Amendment No. 1 to Form S-11 Registration Statement(Registration No. 333-168407) filed by the Registrant with the Securities and ExchangeCommission on October 4, 2010 (4)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on April 7, 2011 (5)Previously filed with the Pre-effective Amendment No. 1 to Form S-11 Registration Statement(Registration No.: 333-176604) filed by the Registrant with the Securities and ExchangeCommission on November 2, 2011 (6)Previously filed with the Form S-3 Registration Statement (Registration No.: 333-214531) filed bythe Registrant with the Securities and Exchange Commission on November 9, 2016 (7)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on March 15, 2012 (8)Previously filed with the Form S-3 Registration Statement (Registration No.: 333-211924) filed bythe Registrant with the Securities and Exchange Commission on June 9, 2016 (9)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on January 7, 2014 (10)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on June 6, 2016 (11)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on August 28, 2013 (12)Previously filed as Annex B to the Definitive Proxy Statement on Schedule 14A filed by theRegistrant with the Securities and Exchange Commission on March 21, 2013 (13)Previously filed with the Pre-effective Amendment No. 2 to Form S-3 Registration Statement(Registration No. 333-211924) filed by the Registrant with the Securities and ExchangeCommission on November 8, 2016 (14)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on May 5, 2016 (15)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on January 26, 2017 (16)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on June 26, 2014 (17)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on August 10, 2016144Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (18)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on February 17, 2015 (19)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on October 5, 2016 (20)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on January 8, 2016 (21)Previously filed as Annex A to the Definitive Proxy Statement on Schedule 14A filed by theRegistrant with the Securities and Exchange Commission on March 19, 2015 (22)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on January 9, 2017 (23)Previously filed form of with the Pre-effective Amendment No. 2 to Form S-3 RegistrationStatement (Registration No. 333-211924) filed by the Registrant with the Securities and ExchangeCommission on November 8, 2016 (24)Previously filed with the Annual Report on Form 10-K filed by the Registrant with the Securitiesand Exchange Commission on March 15, 2012 (25)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on October 15, 2013 (26)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on February 24, 2017 (27)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on August 31, 2017 (28)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on January 29, 2018 (29)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on July 10, 2017 (30)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on April 11, 2017 (31)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on March 29, 2017 (32)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on March 6, 2017 (33)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on December 21, 2018 (34)Previously filed with the Current Report on Form 8-K filed by the Registrant with the Securitiesand Exchange Commission on May 5, 2018145Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PREFERRED APARTMENT COMMUNITIES, INC. Date: March 1, 2019 By: /s/ Daniel M. DuPree Daniel M. DuPree Chief Executive Officer (Principal Executive Officer) Date: March 1, 2019 By: /s/ John A. Isakson John A. Isakson Chief Financial Officer (Principal Financial Officer) Pursuant to the requirements of Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on the dates indicated. Signature TitleDate /s/ Daniel M. DuPreeChief Executive OfficerMarch 1, 2019Daniel M. DuPree(Principal Executive Officer) /s/ Leonard A. Silverstein President, Chief Operating Officer and DirectorMarch 1, 2019Leonard A. Silverstein /s/ John A. Isakson Chief Financial Officer (Principal Financial Officer)March 1, 2019John A. Isakson /s/ Michael J. CroninExecutive Vice President, Chief Accounting Officer and TreasurerMarch 1, 2019Michael J. Cronin(Principal Accounting Officer) /s/ Steve Bartkowski DirectorMarch 1, 2019Steve Bartkowski /s/ Gary B. Coursey DirectorMarch 1, 2019Gary B. Coursey /s/ Daniel M. DuPree DirectorMarch 1, 2019Daniel M. DuPree /s/ William J. Gresham, Jr. DirectorMarch 1, 2019William J. Gresham, Jr. /s/ Howard A. McLure DirectorMarch 1, 2019Howard A. McLure /s/ Timothy A. Peterson DirectorMarch 1, 2019 Timothy A. Peterson /s/ John Wiens Director March 1, 2019John Wiens 146Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 21 Subsidiaries of Preferred Apartment Communities, Inc. NameJurisdiction of Formation 360 Forsyth Lending, LLCDelaware360 Ft. Myers Lending, LLCDelaware360 Ft Myers Capital Lending, LLCDelaware525 Avalon Park, LLCDelawareAltman Pasco Capital Lending, LLCDelawareAltman Pasco Lending, LLCDelawareBarclay Crossing, LLCDelawareBerryessa Lending, LLCDelawareBristol Birmingham Lending, LLCDelawareCDP Duval Lending, LLCDelawareClaiborne Crossing, LLCDelawareDeltona Landing, LLCDelawareHaven Campus Communities Kennesaw Member, LLCGeorgiaHaven Campus Communities Kennesaw, LLCDelawareHaven Charlotte Capital Lending, LLCDelawareHaven Charlotte Lending, LLCDelawareMain Street Apartment Homes, LLCMarylandMain Street Baldwin, LLCDelawareMain Street Stone Creek, LLCDelawareManassas Mezzanine Lending, LLCGeorgiaMulberry Alexandria Lending, LLCDelawareMulberry Alexandria Capital Lending, LLCDelawareNew Market - Anderson, LLCDelawareNew Market - Brawley, LLCDelawareNew Market - Castleberry, LLCDelawareNew Market - Champions, LLCDelawareNew Market - Cherokee, LLCDelawareNew Market - Conway, LLCDelawareNew Market - Crossroads, LLCDelawareNew Market - Cumming, LLCDelawareNew Market - East Gate, LLCDelawareNew Market - Fairview, LLCDelawareNew Market - Furys Ferry, LLCDelawareNew Market - Gallatin, LLCDelawareNew Market - Gayton, LLCDelawareNew Market - Governors, LLCDelawareNew Market - Heritage, LLCDelawareNew Market - Hollymead, LLCDelawareNew Market - Irmo, LLCDelawareNew Market - Maynard, LLCDelawareSource: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.New Market - Neapolitan, LLCDelawareNew Market - Oak Park, LLCDelawareNew Market - Overlook, LLCDelawareNew Market - Parkland, LLCDelawareNew Market - Parkland Outparcel, LLCDelawareNew Market - Plano, LLCDelawareNew Market Properties, LLCMarylandNew Market - Rockbridge, LLCDelawareNew Market - Rosewood, LLCDelawareNew Market - Royal Lakes, LLCDelawareNew Market -RW, LLCDelawareNew Market - Sandy Plains, LLCDelawareNew Market - Southgate, LLCDelawareNew Market - Summit Point, LLCDelawareNew Market - Thompson Bridge, LLCDelawareNew Market - University Palms, LLCDelawareNew Market - Victory Village, LLCDelawareNew Market - Wade Green, LLCDelawareNew Market - West Town, LLCDelawareNew Market - Woodmont, LLCDelawareNewport Bishop Lending, LLCDelawareNewport Morosgo Lending, LLCDelawareNewport Morosgo Capital Lending, LLCDelawareNMP Kingwood Glen, LLCDelawareOxford Brentwood Lending, LLCDelawareOxford Brentwood Capital Lending, LLCDelawareOxford City Vista Development, LLCGeorgiaOxford City Vista Apartments, LLCDelawareOxford Gateway Lending, LLCDelawareOxford Gateway Capital Lending, LLCDelawareOxford Kingson Lending, LLCDelawareOxford Kingson Capital Lending, LLCDelawarePAC Adara, LLCDelawarePAC Aldridge at Town Village, LLCDelawarePAC Brookwood Center, LLCDelawarePAC Carveout, LLCDelawarePAC Citilakes, LLCDelawarePAC Citrus Village, LLCDelawarePAC Citypark View, LLCDelawarePAC City Park View II, LPDelawarePAC City Vista Apartments, LLCDelawarePAC Creekside, LLCDelawarePAC Crosstown Walk, LLCDelawarePAC Cypress, LLCDelawarePAC Dawson Lending, LLCDelawarePAC Finance, LLCMarylandSource: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.PAC Founders Village, LLCDelawarePAC Galleria 75, LLCDelawarePAC Galleria 75 II, LLCDelawarePAC Green Park, LLCDelawarePAC Greenstone Augusta Lending, LLCDelawarePAC Hidden River, LLCDelawarePAC Lending, LLCDelawarePAC Lenox, LLCDelawarePAC Lenox Regent, LLCDelawarePAC Lenox Retreat, LLCDelawarePAC Lenox Village, LLCDelawarePAC Luxe, LLCDelawarePAC MBS, LLCDelawarePAC Midlothian, LLCDelawarePAC ML04, LLCDelawarePAC Naples, LLCDelawarePAC NC GP, LLCDelawarePAC Overlook at Crosstown Walk, LLCDelawarePAC Overton Rise, LLCDelawarePAC Northpointe, LLCDelawarePAC Reserve at Summit Crossing, LLCDelawarePAC Retreat at Greystone, LLCDelawarePAC Sarasota, LLCDelawarePAC Sorrel, LLCDelawarePAC Sorrel II, LLCDelawarePAC Summit Crossing, LLCGeorgiaPAC Summit Crossing II, LLCDelawarePAC Vestavia, LLCDelawarePAC Vineyards, LLCDelawarePACOP Special Member, Inc.DelawareParkway Centre, LLCDelawareParkway Town Centre, LLCDelawarePCC College Station, LLCDelawarePCC Lubbock, LLCDelawarePCC Orlando, LLCDelawarePCC Stadium Village, LLCDelawarePCC Tallahassee, LLCDelawarePCC Tempe, LLCDelawarePCC Waco, LLCDelawarePOP 150 Fayetteville, LPDelawarePOP 150 GP, LLCDelawarePOP 3 Ravinia, LLCDelawarePOP 8 West Construction Lending, LLCDelawarePOP 8 West Mezzanine Lending, LLCDelawarePOP Armour Yards, LLCDelawarePOP Capitol Towers, LPDelawareSource: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.POP Carveout, LLCDelawarePOP NC GP, LLCDelawarePOP Westridge, LLCDelawarePowder Springs-Macland Retail, LLCDelawarePreferred Apartment Communities Operating Partnership, L.P.DelawarePreferred Campus Communities, LLCMarylandPreferred Office Properties, LLCMarylandSalem Cove, LLCDelawareSE Grocery LLCDelawareSpring Hill Plaza, LLCDelawareStarkville Mezzanine Lending, LLCGeorgiaStoneridge Farms Hunt Club, LLCDelawareStone Rise Apartments, LLCDelawareSunbelt Retail, LLCDelawareSweetgrass Corner, LLCDelawareTP Kennesaw Lending, LLCDelawareTP Kennesaw II Lending, LLCDelawareTP Kennesaw Capital Lending, LLCDelawareWAM McNeil Ranch, LLCDelawareWoodstock Crossing Center, LLCGeorgiaSource: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.EXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-181165, No. 333-191418, No. 333-210281) andForm S-3 (No. 333-188677, No. 333-183355, No. 333-211178, No. 333-211924, No. 333-214531) of Preferred Apartment Communities, Inc. of our reportdated March 1, 2019 relating to the financial statements, financial statement schedules and the effectiveness of internal control over financial reporting,which appears in this Form 10-K./s/ PricewaterhouseCoopers LLP Atlanta, GA March 1, 2019Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.EXHIBIT 31.1CERTIFICATIONSI, Daniel M. DuPree, certify that:1.I have reviewed this annual report on Form 10-K of Preferred Apartment Communities, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 1, 2019/s/ Daniel M. DuPree Daniel M. DuPree Chief Executive Officer Source: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.EXHIBIT 31.2CERTIFICATIONSI, John A. Isakson, certify that:1. I have reviewed this annual report on Form 10-K of Preferred Apartment Communities, Inc.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. Date: March 1, 2019/s/ John A. Isakson John A. Isakson Chief Financial OfficerSource: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 32.1Furnished (but not filed) as an exhibit to the periodic report identified in the Certification.CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Preferred Apartment Communities, Inc. (the "Company") on Form 10-Q for the period ended December 31,2018 as filed with the Securities and Exchange Commission (the "Report"), I, Daniel M. DuPree, Chief Executive Officer of the Company, certify, pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 1, 2019 /s/ Daniel M. DuPree Daniel M. DuPree Chief Executive OfficerSource: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Exhibit 32.2Furnished (but not filed) as an exhibit to the periodic report identified in the Certification.CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Preferred Apartment Communities, Inc. (the "Company") on Form 10-K for the period ended December 31,2018 as filed with the Securities and Exchange Commission (the "Report"), I, John A. Isakson, Chief Financial Officer of the Company, certify, pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 1, 2019 /s/ John A. Isakson John A. Isakson Chief Financial OfficerSource: PREFERRED APARTMENT COMMUNITIES INC, 10-K, March 01, 2019Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.27 PREFERRED APARTMENT COMMUNITIES, INC. 3284 Northside Parkway NW, Suite 150, Atlanta, GA 30327 EX ECU TIVE MAN AGEMENT & LEAD ER SHIP TE AM DANIEL M. DUPREE Chairman & Chief Executive Officer LEONARD A. SILVERSTEIN Co-Founder, Vice Chairman, President & Chief Operating Officer WILLIAM BARKWELL Chief Operating Officer – Preferred Campus Management MICHAEL J. CRONIN Executive Vice President, Chief Accounting Officer & Treasurer – Preferred Apartment Communities PAUL CULLEN Executive Vice President & Chief Marketing Officer – Preferred Apartment Communities; Chief Executive Officer – Preferred Campus Communities BOONE DUPREE Chief Executive Officer – Preferred Office Properties WILLIAM R. FORTH Executive Vice President & Chief Asset Management Officer – Preferred Apartment Communities KIMBERLY HODGE Executive Vice President & Chief Property Management Officer – Preferred Apartment Communities ROB GAYLE Chief Operating Officer – Preferred Residential Management JOHN ISAKSON Executive Vice President & Chief Financial Officer – Preferred Apartment Communities JOEL T. MURPHY President & Chief Executive Officer – New Market Properties JEFFERY D. SHERMAN Executive Vice President & Managing Director, Multifamily – Preferred Apartment Communities JEFF SMITH Chief Executive Officer – Preferred Capital Securities BOARD OF DIRECTORS DANIEL M. DUPREE Chairman & Chief Executive Officer LEONARD A. SILVERSTEIN Co-Founder, Vice Chairman, President & Chief Operating Officer STEVE BARTKOWSKI Business Development, DPR Construction, Inc. GARY B. COURSEY Founder, Gary B. Coursey & Associates Architects WILLIAM J. GRESHAM, JR. Consultant, Gresham Real Estate Advisors, Inc. HOWARD A. MCLURE Lead Independent Director PROSKAUER ROSE LLP New York, NY TIMOTHY A. PETERSON Partner and Chief Financial Officer, Altman Development Corporation JOHN M. WIENS Independent Director LEGAL COUNSEL JEFFREY R. SPRAIN Executive Vice President, General Counsel & Secretary – Preferred Apartment Communities JARED A. SEFF Assistant General Counsel – Preferred Apartment Communities AUDITOR PRICEWATERHOUSECOOPERS LLP Atlanta, GA TAX ADVISORS ERNST & YOUNG LLP Atlanta, GA TRANSFER AGENT COMPUTERSHARE TRUST COMPANY, N.A. Canton, MA SAFE HARBOR NOTICE This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Our actual results could differ materially from those set forth in each forward-looking statement. Certain factors that might cause such a difference are discussed in this Annual Report, including in the section entitled “Forward-Looking Statements” included elsewhere in this Annual Report. You should also review the section of this Annual Report entitled “Risk Factors” for a discussion of various risks that could adversely affect us. On February 14, 2017, the Securities and Exchange Commission (the “SEC”) declared effective our registration statement on Form S-3 (file number 333-211924, the “Series A Registration Statement”) for our offering of up to 1,500,000 Units, with each Unit consisting of one share of our Series A redeemable preferred stock, and one warrant to purchase 20 shares of our Common Stock, which is offered by the dealer manager on a “reasonable best efforts” basis. On December 2, 2016, the SEC declared effective our registration statement on Form S-3 (file number 333-214531, the “Series M Registration Statement”) for our offering of up to 500,000 shares of Series M redeemable preferred stock, which is offered by the dealer manager on a “reasonable best efforts” basis. This Annual Report shall not constitute an offer to sell or the solicitation of an offer to buy the securities offered by the Company pursuant to either the Series A Registration Statement or the Series M Registration Statement, nor shall there be any offer or sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. Each offering will be made only by means of a prospectus which is part of each of the Series A Registration Statement and the Series M Registration Statement. PAC RECYCLES Created by PAC Marketing Department. 3284 Northside Parkway NW, Suite 150 | Atlanta, GA 30327 | 770.818.4100 | pacapts.com 

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