By Leah Etling, Contributing Editor
The senior Isakson, a former Realtor, indirectly led his son into real estate the old-fashioned way: by taking his kids to the office on Saturday mornings while he finished up paperwork. They toured houses he had listed in the Atlanta area together, too. John Isakson jokes that he “never had a chance” to choose another career path, but he’s forged his own way, diving into finance after studying economics at Tulane University and the University of Georgia, where he earned his master’s degree.
He was recently promoted to chief capital officer for a small, publicly traded REIT focusing on high-quality apartment assets, Preferred Apartment Communities Inc. Preferred Apartments’ CEO John Williams is the founder and former CEO of Post Properties.
Preferred Apartment Communities started with a $50 million market cap when it went public in April 2011, and Isakson said the cap is now approaching $120 million.
“We’re focused on a national platform, and even though we’re small, we have assets from Philadelphia to Texas. As the company continues to grow and our fundraising channel continues to expand, I think we’re going to have broad geographic diversification in our portfolio,” Isakson said.
MHN talks to Isakson about Preferred Apartment Communities and multifamily issues that legislators should be aware of.
MHN: Tell us about the set up for Preferred Apartment Communities?
Isakson: We are a publicly traded REIT, although a small one, that focuses on apartments. We are dedicated to apartments, though we have a couple of other nominal investments. The broad/deep focus of the company is multifamily, which is John Williams’ background and my background. The bulk of the senior executive team have spent their careers in multifamily. I think that’s one of the things that differentiates us as an organization. We are truly specialists in multifamily. Though some of us have done things outside of that, it’s really our core competency.
Our philosophy is to have a relatively young portfolio. We are a yield-driven, dividend-driven company. We buy properties that are typically 15 years and newer. We’ve done some outside of that, but the assets we have that are a little older had had substantial renovations before we bought them, which gave us some comfort that the assets were of a quality and had the longevity that we were looking for.
MHN: What are the specifics of the portfolio?
Isakson: We have six assets that are operating and 10 mezzanine loans, investments we’ve made in developments, for a total of 16 assets. We have a couple of assets in Florida, a couple in North Carolina, we have four to five in Georgia, a couple in Pennsylvania, we have two in Virginia and we have one in Texas.
Our mezzanine loan program provides us with the opportunity to build up an acquisition pipeline, because each of our mezzanine loans typically has a purchasing option associated with it. It gives the company the right to purchase the asset upon stabilization, so long as they’ve reached the goals and objectives we had originally set out for the asset.
We have two focuses: continuing to raise capital and continuing to grow the company. When we went public (in April of 2011) we were about a $50 million market cap, today we’re almost $120 million market cap. Obviously, being a public company, scale is important. We think that now is a great time to be investing in multifamily, so it’s a good time to be deploying the capital that we’re raising. As we continue to raise money in both the preferred stock that we’re selling and in our common stock, we’ll deploy that into a balance of operating assets and mezzanine loans. The percentage of those depends on how the market is doing.
MHN: Why did you decide to go public?
Isakson: We looked at a non-traded REIT structure, and we had been in the fund management business previously—I managed the private equity fund that we raised in 2006 and 2007—and institutional capital had a dislocation between return expectations and what was available on the market. We didn’t have a ton of confidence that the institutional capital was going to be as readily available as it had been in the past. When we looked at the non-traded REIT space, it’s amazing that through economic ups and downs, that fundraising channel has been very consistent. It has been increasing even when other capital sources are drying up, and it felt like it was a great way for us to tap into a more consistent fundraising channel, which is always a good match for a company like ours that is looking to acquire and grow.
At the end of the day, we weren’t comfortable with the non-traded REIT structure. We felt like there were a lot of bumps in the road to come from a regulatory standpoint, and John had so much experience being the CEO of a public company—he had done it before and understood it. So we decided to go and take the company public, but multi-market a preferred stock into the non-traded REIT space. We felt it would give us an advantage in the fundraising process, because it allows us to sell a security that we think is better for investors than some of the common stock that is being sold by the non-traded REITs.
MHN: What type of investors are you attracting?
Isakson: From the raises that we’ve done, we are held more by retail investors than by institutions and that’s predominantly because of our size. We just don’t have the market capitalization to really attract the bigger institutional investors, because their limitations on flows and liquidity would prohibit them from making a meaningful investment. By and large it is retail investors, certainly on the preferred stock side, we’re marketing through the non-traded broker/dealer channel, so it’s those same type of investors. For smaller retail investors, our ticket average is probably somewhere in the $35,000-$40,000 range.
MHN: What issue facing multifamily today do you think is most important for our legislators to be aware of?
Isakson: For the multifamily industry, there is probably no more important issue for our industry today than Fannie Mae and Freddie Mac reform. Tax policy and monetary policy is important, and we’ll all be impacted by that, and jobs and what the government is doing to expand the economy. But for the multifamily industry, the role that Freddie Mac and Fannie Mae play in our business is pretty unique. It’s a vital, important role and a role that they play particularly well. Preserving it is what’s best, in my opinion. It’s what’s best for housing in this country, what’s best for the government if they want to continue to have a mission in housing in this country, and it’s important for the market and important for us as market participants if we want to continue to have a viable transactional system. There’s not enough capital out there to pick up the slack if Fannie and Freddie were to go away.
MHN: Are you involved personally in making Congress more aware of this?
Isakson: One of the things I have been working very hard on, and my father has been a huge proponent of along with Senator Corker (R-TN) and Senator Warner (D-VA) and Senator Tester (D-MT)—it’s really been a bipartisan effort—we’ve tried to just educate folks up in Washington about the importance of Fannie and Freddie to the multifamily market, and the importance of the multifamily market to the overall economy. When single-family homeownership falls from almost 70 percent to below 65 percent, that means that more than 5 million rental households have been created. Those people have to go somewhere. They aren’t all going to apartments, but multifamily housing provides the bulk of the replacement housing.
MHN: Is there really a worry over the possible sunset of multifamily lending from Fannie and Freddie?
Isakson: If you look at the history over the last six to seven years of Freddie Mac and Fannie Mae, they did exactly what they were supposed to do, exactly the way they were supposed to do it, and they made money at it.
I think what we’re hopefully going to be able to do going forward is craft reform that allows those divisions to continue to operate in a responsible manner for the betterment of the taxpayers and the economy.