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Preferred Apartment Communities Inc (NYSE:APTS)
Q4 2019 Earnings Call
Feb 25, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen and welcome to Preferred Apartment Communities' Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions]

I would now like to introduce your host for today's conference call, Paul Cullen, Executive Vice President of Investor Relations. Please go ahead.

Paul Cullen -- Executive Vice President and Chief Marketing Officer

Thank you for joining us this morning, and welcome to Preferred Apartment Communities' fourth quarter 2019 earnings call. We hope each of you have had an opportunity to review our fourth quarter earnings report, which we released yesterday after the market close. In a moment,

I'll turn the call over to Joel Murphy, our Chief Executive Officer to share some initial thoughts; and then John Isakson, our Chief Financial Officer, who'll share some additional details about financial metrics and capital markets. Then Joel will return to conclude our prepared remarks. Following Joel's remarks we'll be pleased to answer any questions you might have. Also present with us this morning is Mike Cronin, our Chief Accounting Officer, and Jeff Sherman, Michael Aide, and Boone DuPree, the business leaders of our three primary product verticals.

I would like everyone to note that forward-looking statements may be made during our call. These statements are not guarantees of future performance and will involve various risks and uncertainties, and actual results may differ materially. For a discussion of those risks and uncertainties, you should review our forward-looking statements disclosures in yesterday's earnings press release as well as our SEC filings.

Our press release and other SEC filings can be found on our website at pacapts.com. The press release also includes our supplemental financial data report for the fourth quarter 2019 with definitions and reconciliations of non-GAAP financial measures and other terms that may be used in today's discussion and the reason management uses these non-GAAP measures.

We encourage you to refer to this information during the review of our operating results and financial performance. Unless we otherwise indicate all per share results that we discuss this morning are based on basic weighted average shares of common stock and Class A partnership units outstanding for the period.

I would now like to turn the call over to Joel Murphy. Joel?

Joel T. Murphy -- Chief Executive Officer

Thank you, Paul and good morning, everyone and thank you for joining our call. While I have been a part of the senior management team at PAC since October 2014 and have participated in many of these quarterly calls, this is my first as ex-Chief Executive Officer. I've been in the real estate business in leadership positions for over 30 years with public and private companies, and I can tell you that I've never been more excited about a company, the team, real estate strategy and the future opportunities that lie ahead.

I know many of you listening in on this call having met you over the years at NAREIT, and in our offices here in Atlanta or on various trips to visit your office. John Isakson and I will be out on the road even more in the months ahead on such visits. And the entire PAC team looks forward to having you visit us here in Atlanta, especially so, during NAREIT, which will be hosted in Atlanta this November. We would also welcome meetings with any of you at any one of our 100 plus properties.

In preparation for taking this role and in since July of 2018 I served as the Chair of our Investment Committee, which oversees the approval of capital investment by the Company. During these past 18 months we have acted upon approximately $700 million in acquisition activity, approximately $125 million of new real estate investment loans, over $400 million in asset sales and nearly $100 million in property level debt refinancing across all of our platforms. While this certainly gave me hands on experience across all of our property types. As importantly, it gave me the opportunity to work closely with the leadership and teams running these businesses and these transactions and running them quite well.

I do want to be very clear on a point about our multi-product type strategy. While I have acted in the role as the business leader of the grocery anchored component of our business and Chair of the Investment Committee, I am fully committed as we are as a leadership team to the multifamily segment of our business being the primary and core foundation of our Company. We have deeply experienced and passionate teams up and down and across in this Company. And I'm honored and excited to have the opportunity to work alongside them, to successfully execute our real estate and our capital strategy.

2019 was a strong year for us in terms of operating performance across all of our platforms. Most notably, our fourth quarter quarter-over-quarter 5.1% same-store growth in our core multifamily business and a 4.1% year-over-year growth compared to 2018. This same-store pool comprises over 60% of our 10,245 units and 61% of our multifamily revenue. The total multifamily portfolio has an average age of 5.7 years, the youngest among public REITs. 2019 and on into these first two months of 2020 has been a time of organizational change with the implementation of our succession plan and the closing of our internalization transaction on January 31st for the management functions of Preferred Apartment Advisors and NMP Advisors were brought inside PAC.

This is a tremendous new beginning for us. And this internalized management structure positions PAC well and gives us added flexibility as we enter our next phase of creating stockholder value. Our 8-K and related materials that we released on February, the 3rd contain the details of the transaction, but at a high level, the result create a structure of full alignment between management and stockholders and while shorter term diluted represents a present and longer-term accretive deployment of capital that gives us the opportunity for enhanced earnings growth and long-term value creation, allows PAC to fully enjoy the benefits of our significant scale and growth potential as well as creating enhanced transparency. Real estate is a longer term business, and we will always seek to build long-term value for our stockholders. We will be happy to address any further questions you might have about the internalization during our Q&A.

With internalization complete, we are set to focus on PAC's broader capital strategies. We will be doing this and sharing our plans and strategies with you and the market as they take shape with a renewed and fresh perspective on our capital stack and balance sheet. We will continue to focus on achieving excellence with particular attention on our companywide operating performance, our governance, the training and development of our associates, our culture, our ESG initiatives and our philanthropy of giving back to the communities in which we operate.

Now let me turn the call over to John Isakson. John?

John Isakson -- Chief Financial Officer

Thanks, Joel. As we have noted in the past, our AFFO can -- and will be highly valuable -- variable and from quarter [Technical Issues].

Operator

Pardon me, ladies and gentlemen, it appears we lost our audio with the speakers. And ladies and gentlemen, thank you for your patience. Please standby while we reconnect our speaker line. One moment please. Thank you again for your patience. And pardon me, ladies and gentlemen, we have reconnected our speakers. And I will ask them to please continue.

John Isakson -- Chief Financial Officer

Thank you for joining us. Sorry about the technical difficulties there. For the fourth quarter 2019 PAC generated revenues of approximately $125 million; FFO of $0.31 a share; and AFFO, $0.35 a share. You will note, our revenues were up over 17% compared to the fourth quarter of 2018, owing to the continued growth in all of our property verticals. For the full year 2019, we generated FFO of $1.37 per share. However, this includes significant costs related to our internalization transaction of over $1.8 million for the quarter and $3 million for the year.

Excluding these costs, our FFO per share was $1.44 for the year. In addition to the cost incurred in the fourth quarter there were significant costs incurred with the closing of the transaction in the first quarter of 2020. Those costs will impact our results over the course of this year. Turning to our guidance for 2020. This guidance is reflective of both the impact of internalization and other one-time items that occurred in 2019, like our sale with Freddie Mac ML pools that generated a great return for our Company and created over $1.6 million in FFO in the fourth quarter of 2019.

Internalization was an excellent investment for PAC, and it is just that an investment. It should be accretive over time and provide a substantial economic benefit to the Company. However, many of these benefits are realized over time, and not all of them accrued FFO. We have eliminated all of our recurring fees as a result of internalization, G&A, property management, asset management fees, those accrued FFO more quickly.

We've also eliminated the fee streams associated with transactions, such that there are no more acquisition fees or financing loan origination fees. This results in a material savings to the Company, but the savings does not benefit FFO immediately as these fees are capitalized and amortized over the life of the deal. These fees savings also create accretion in new acquisitions by significantly reducing the marginal costs of adding new deals to the portfolio.

There are a number of different one-time items that could impact our numbers this year, like the sale of our student housing assets next month. We anticipate that we will be updating guidance more frequently this year as the picture becomes clear and as items settle. We have demonstrated our commitment to doing what's right for our shareholders and we will continue to do so as we navigate the Company in its next phase of growth. As we have noted in the past, our AFFO can and will be highly variable and from quarter-to-quarter or year-to-year. This variability in our AFFO can be attributed in large part to two line items, accrued interest income received and amortization of purchase option termination revenues.

You will note for the fourth quarter this year compared to last year we had almost $7 million less in accrued interest income received. While we booked accrued interest income every quarter, the actual cash payment of this interest comes in when the developer borrower under the real estate loan investment has a capital event, meaning either a sale or a refinance of the property. The variance in this line item alone can account for the total variance in our AFFO.

For example, our supplemental financial disclosure includes a note about a loan that paid off in January, resulting in a collection of approximately $2.7 million of accrued interest which will impact our first quarter AFFO. We currently have approximately $25 million of accrued interest from 27 real estate investment loans that are booked as a receivable in our financial statements. The loan portfolio continues to add accrued interest every quarter from both current loans and new loans that are added. The payoffs on these loans are difficult to predict due to the timing of the sales of these assets, whether to PAC or to third parties. That said, if you simply took the total receivable and spread it across 12 quarters that would equal a run rate of over $8 million a year or $0.045 a share AFFO per quarter or $0.18 a year.

One thing we can certainly say for sure on this topic is it won't happen just like that. If anything, the payouts are skewed sooner rather than later. The balance in our investment loan program stands at just over $414 million in commitments, with over $352 million drawn at quarter's end. The current book of loans consists of 4,674 multifamily units, 1,079 student housing beds and 192,000 square feet of office space. Our book is relatively constant as loans pay-off and new loans are initiated, at the same time our total assets continue to grow. The result being a loan book which was once 25% of our total assets is now less than 10%.

As previously discussed, we continue to focus on increasing the float of our common stock. During the fourth quarter this year we issued an aggregate of over 1 million shares of our common stock in connection with the redemptions of our preferred stock and the exercise of warrants previously issued under our Series A preferred stock in unit offerings. Overall, we had 46.4 million shares of common stock outstanding as of December 31st, 2019, representing an increase of about 11% compared to the fourth quarter of 2018.

As an internalized Company, one of our primary focus is going forward will be our capital stack and the relationship between our preferred and common stock. From a capital markets perspective, we have seen some interesting developments recently. Interest rates have again declined in the fourth quarter and further into the first quarter of this year and currently stood around the lows achieved over the summer of 2019 and over 150 basis points lower than the highs seen in late 2018.

The recent fears over the coronavirus and its impact on the global economy this year have accelerated recently and created a flight to safe havens and rates have plummeted as a result. To that end, we continue to take a cautious approach to our acquisition and portfolio financing strategy, approximately 97% of our permanent profitable mortgage debt has fixed interest rates or variable interest rates that are capped. We have no loan maturities left for 2020 and only $321 million in mortgage maturities across 15 independent deals coming due in 2021 and 2022. This means we don't have any significant refinancing risk and the event rates move dramatically.

To fund the cost of internalization, along with cash surpluses, we use funds from our line of credit. We believe the current capacity of our line of credit will serve us for the foreseeable future. Beyond the $200 million we have in current capacity, our accordion feature allows us to expand the facility up to a total of $300 million.

We continue to maintain investment discipline across our platform in every vertical. Currently, this has resulted in us having uninvested cash on the balance sheet. While this is dilutive short term, given our pipeline and the current market conditions, we fully expect these funds to be invested accretively over the course of the year, the full benefit of which we would realize in 2021.

In summary, the Company continues to be very well positioned financially to take advantage of the current capital markets environment without being overly exposed to its wins in the next few years. I would like turn the call back to Joel for some further thoughts. Joel?

Joel T. Murphy -- Chief Executive Officer

Thank you, John. So I'd like to go into some more detail about our real estate business and our markets, because they can sometimes be overshadowed by corporate structure and capitalization topics, but at the end of the day these are the foundations of our success. I'm a firm believer that the quality of our assets the soundness of our strategies and the prospects of our geographic markets are second to none. We have built scaled businesses in each of our multi-housing, retail and office division, investing in Class A properties and top performing growth markets.

At the end of the fourth quarter PAC's portfolio totaled more than 12,000 multifamily and student housing units, close to 10 million square feet of grocery anchored necessity retail and Class A office property. This is altogether more than approximately 20 million square feet of leasable space. We're a fully integrated real estate company within each of our verticals and at the corporate level with best in class acquisitions, lending, development, management and operation platforms in-house.

Whether under the PAC banner or in past compositions, this leadership team has long subscribed to the Sunbelt and its growth story as a cornerstone of our investment thesis. At the end of the fourth quarter more than 80% of our owned portfolio or about 18.5 million square feet were located in our top five states, Florida, North Carolina, Georgia, Texas and Tennessee. Our assets in these states also generated approximately 84% of the Company's property level revenues. These states share common themes of pro-business policy and competitive cost of doing business, access to talent and affordable cost of living. So it's no surprise that we continue to see a steady stream of companies like McKesson, Honeywell, AllianceBernstein, Apple, Charles Schwab relocating out of higher cost market.

Job growth drives population growth and demand across our multifamily, retail and office strategy. And we see the tangible result of this in escalating rents and low vacancy rate. In our multifamily portfolio, we are 95.1% leased and coming off an impressive 5.1% same-store quarter-over-quarter increase.

In our new market grocery anchored retail subsidiary, we are 95.3% leased, a 40 basis points from the end of the third quarter, excluding redevelopment, with grocer sales averaging approximately $550 per square foot, well above industry average. We are now the fourth largest Publix landlord in the country. And in our office division, we are 96% leased with more than seven years of average contractual lease term remaining, an approximate 24% average cash rent roll up on more than 200,000 square feet of second generation leasing in 2019.

Let me give you an example of the benefits that we see and experience in our multi-dimensional strategy. In the fourth quarter, we acquired Hanover Shopping Center, an approximately 300,000 square foot Harris Teeter anchored center located in Wilmington, North Carolina. Hanover is an exciting $50 million plus investment for us.

First is the dominant center in the trade area with the market leading grocer Harris Teeter generating very strong sales. The acquisition includes an additional 7 acres of vacant developable land to the rear of the zone. Our retail and multifamily groups are working side by side on a plan for the ground up development of approximately 250 apartments on this land. This is an excellent example of PAC's ability to leverage our vertical platforms, to create additional value on our properties and on new opportunity. You can expect to see more of this in the future as this is a defined strategy for us.

The Sunbelt story is well documented and often communicated and rightfully so. Growth is the driver of everything we did. Relocating and growing businesses create jobs that drive demand for office space. New jobs turned into apartment renters, new residents shop at our grocery-anchored shopping centers. So to recap, we are a real estate company of significant scale that has operating teams and assets operating at a high level in high growth Sunbelt markets, and now with an optimized organizational structure in place, we look forward to taking full advantage of the opportunities ahead.

So now I'll turn the call back over to Paul. Paul?

Paul Cullen -- Executive Vice President and Chief Marketing Officer

Thank you, Joel. Now I'd like to ask the operator to open the floor for any questions you may have. Go ahead, operator.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from Gaurav Mehta of National Securities. Please go ahead.

Gaurav Mehta -- National Securities -- Analyst

Thanks. Good morning. First question I have is on the 2020 guidance, I was hoping if you would provide some more -- more color on what's driving the guidance. If I -- if I take the internalization expense out of 2019 and '20, implying like a 23% decline year-over-year, so maybe we are hoping to get some more color on that. And help us bridge the gap between $34 million in cash savings that that you talked about during internalization versus earnings decline?

John Isakson -- Chief Financial Officer

Right. Hey, Gaurav. This is John Isakson. I think a couple of things keep in mind is we've discussed, the cash savings is not the same as FFO and AFFO and earnings. As I mentioned in the call, some of the savings that we will realize don't result in an immediate benefit FFO because of the way those fees get treated.

In addition, the one-time items that we had in 2019 like our -- the ML pools that we sold. And if you look at the -- and we mentioned the balance of the real estate investment loan program, which is -- while the real estate investment loan program is incredibly healthy and incredibly profitable for us it has declined as a percentage of our asset base and so that revenue is now less impactful. So, it's a combination of the internalization cost, as well as the one-time items that we had in 2019. And we're also -- and look, we're looking at the capital stack, we're aware of the sensitivity and what we do this year with that could well impact our results and we want to be sensitive to that.

Gaurav Mehta -- National Securities -- Analyst

Okay. And I guess from a modeling perspective which line items on your income statement are going away? I would assume asset management, G&A, that's going away, right, starting 2Q?

John Isakson -- Chief Financial Officer

Right. All of the -- if you comparing 2019 to 2020, all of the fees to the manager have been eliminated and obviously that will be replaced with a G&A line item, obviously G&A is going to go up as those folks, and functions port over to the to the REIT. But yes, the fees going out have been eliminated. And the deferred fees that we're sitting on the balance sheet were also eliminated as part of the transaction.

Joel T. Murphy -- Chief Executive Officer

Gaurav, let me just -- this is Joel, let me follow up on John. That's actually exactly correct on those particular line items, but I don't know where this might be where you were going with this or not. But the impact that you just outlined really is one of the great things about the internalization transaction and the things that it does on those recurring fees and as well as the one-time fees that John mentioned that while their cash savings may or may -- will not drop to FFO, because they're amortized.

But just to give you a sense of scale, what this allows us to do is be in the marketplace, as we actively are now and creating accretive transactions where the benefits of scale that the REIT has and you're now to the benefit of the REIT versus to the benefit of the manager.

So, what that does just for example on a $50 million acquisition, really regardless of property type, there's some nuance between them. But let's say a $50 million multifamily deal. So, it's standard assumption maybe 65% LTV, 5 cap rate, just making assumptions looking at our typical expense ratios. These kind of things right off the bat there is plus or minus $700,000 of acquisition fee and loan coordination fees that do not go into the capital stack, OK. So that is a cash savings, that will ultimately derive to more FFO, because we have smaller cost investment in the deal, but it's not necessarily direct FFO because those would have been amortized over the life of the asset.

But the ones that you outlined, the asset management fee, G&A, property management fee, less even some modest assumptions for corporate G&A create additional savings in that context well over $300,000. And that's year end, year out for that asset of recurring fees, which that drops immediately to FFO, but it takes time for that benefit to be done, the capital needs to be redeployed, the asset needs to be put into place and the asset needs to run. Also eliminates any back-end disposition fees or a deferred fees or anything like that. So, I just wanted to put a little finer point on that as it related to the internalization.

Gaurav Mehta -- National Securities -- Analyst

Okay, great. No that's good color. And then I guess, lastly on the dividend. To imply your FFO more or less be in line with your dividend and if you assume that your AFFO will be lower than FFO your dividend may not be covered in 2020? So maybe you know, provide some more color on how comfortable you are with your current dividend level?

Joel T. Murphy -- Chief Executive Officer

Yeah. I am going to let John. John and I both have this, but go ahead, John.

John Isakson -- Chief Financial Officer

So, what we saw, we just announced our dividend for Q1 and as we have always done, we're going to review the dividend every quarter, we're going to evaluate where we are operationally and more closely this year evaluate that. As I said in my remarks, there are a lot of things that could impact our earnings and our performance this year. We do anticipate updating guidance more frequently and we will be -- if necessary, we'll be looking at the dividend as well.

Gaurav Mehta -- National Securities -- Analyst

Okay. Thank you.

Operator

Our next question will come from Barry Oxford at D.A. Davidson. Please go ahead.

Barry Oxford -- D.A. Davidson -- Analyst

Great, guys. Thanks. When you talk about investing going forward, what are the property types that are giving the best risk-adjusted return right now when you're looking out at the landscape?

Joel T. Murphy -- Chief Executive Officer

Hey. Thanks, Barry. This is Joel. Thanks for the question. So I think what I'd say, instead of really looking at kind of just risk-adjusted returns, let me just do a little bit of a descriptive of the different primary investments which we have, which were multifamily, the grocer anchor necessity retail and then the Class A office each of which have their own independent strategies market run by their own teams.

So, if you just kind of look at what market gives us, let's take the multifamily first, because that's our primary piece of our business. Lowest cap rate going in for sure. We all know what's going on in the multifamily business, that is much to our chagrin. Often the demographic forces pushing that are well-known and well heated and will extend out in the future and that's obviously had an impact on the compression of cap rates making it more difficult to buy accretive acquisition.

So that said, Jeff Sherman and his team were very active in the market on that and it might give us the lowest go -- the lower or lowest going in on levered return. But what happens that also you could see from the same-store results we're getting, the return that accrues over time to have the highest growth vehicle.

So, what we would look at that in the real estate world across a 7 to 10 year rise would be its internal rate of return, which for ours of the three product types depending on what happens on the back end could be the highest. That's so, lower going in, higher growth mechanism over time.

The grocery-anchored retail, grocery-anchored retail is probably in the next -- probably in the highest slot for going in yield. Over historically we've been buying around 6, low 6s. Michael Aide and his team have been buying some great properties, higher than that cap rates where we had particular market knowledge or doing some off-market transactions.

So the higher and highest of the three going in on leverage yields, but it's like I always say in retail the good news is we have leases, the bad news is we have leases, OK. So those leases are longer term, they're with credit anchors, like Publix and Harris Teeter and Kroger is what -- is by far the lion's share of that. But those leases by their nature are flat across the term. So that gives us the upside being on our shop space of which we're pretty conservative there too, with the ratio of our small shops. So we do have growth potential. We're getting growth potential in rolling up leases, but it's a smaller piece because the part that you can modulate or move in a multifamily asset is every one of your units, and retail it might be 40% on average of an asset or maybe 50% of the GLA.

Then you get into the Class A office, OK. So that very targeted in the six markets that we like, but it's going in yield will be lower than the retail, higher than the multifamily, but it also has a little different spin to it. We can look at it on a cash return, but we also really need to look at it, because on a GAAP return because of the idea of straight-line leases. And so that kind of gives us the middle one.

So on a GAAP basis it might look relatively flat, but on a real basis as far as just money, it has great growth, because there are contractual rent growth in those, over the term plus we have built in a mechanism, I don't know plus or minus 1% that we can get just on parking revenues for that. But on a GAAP basis, because it's straight line, it looks flatter. So I hope that addresses your question on how we look at those three product types.

Barry Oxford -- D.A. Davidson -- Analyst

No, I think that's great. Yeah, I definitely find it helpful. And then Joel, one question for you. When I think about shares outstanding and shares, you're going to issue here in 2020, in regards to the warrants and stuff, how much do you think you see your share count increasing to allow for that?

Joel T. Murphy -- Chief Executive Officer

So, you know, Barry, I think from warrants the exercises are going to go down. You know, how much, it's hard to quantify. The new issue that we've just started does not have warrants associated with the Series A and the legacy warrants have the ones that are remaining have relatively high strike prices. So I'm anticipating those warrant exercises to go down and potentially dramatically.

In terms of redemptions, it's hard to say, there's some correlation between the preferred stock going into the, redeemable at par [Phonetic] period and redemption exercises, but then it's not a great correlation. So I think, we sold -- we've sold more preferred stocks, I think redemptions are going to go up relatively speaking, but it's hard to say how dramatically. But I do believe the warrant exercise are going to go down.

Barry Oxford -- D.A. Davidson -- Analyst

Okay, that's helpful. Thanks.

Joel T. Murphy -- Chief Executive Officer

Sure. Thanks, Barry.

Operator

And our next question will come from Michael Lewis of SunTrust. Please go ahead.

Michael Lewis -- SunTrust Robinson Humphrey -- Analyst

Great. Thank you. I wanted to ask, if we could get a little bit more detail on the guidance why the FFO is going down so much, it's said in the press release that it excludes, the internalization costs. It sounds like from your comments you expect maybe interest income to come down. I'm curious how much does the G&A item goes up, kind of offsetting some of these fees that go away, maybe you could share acquisition, volume assumptions. Just trying to get a sense for the -- you know the direction and the magnitude and what's driving that?

Joel T. Murphy -- Chief Executive Officer

Yeah. Let me -- thank you, Michael. I think I heard four or five questions. I'm not sure -- I'm not sure I can remember them all. I'll try to take them in some semblance of order. I think first way to look at this is, look clearly in the cost savings and we said that in our investor deck when they were released on February 3rd, we're looking at those in cost savings. That's obviously based on certain assumptions, on acquisition volume, which product types, how we go across the year.

We've already talked about we have cash on the balance sheet that we're going to deploy. So, it's difficult to come up with fine terms on that. But we did make certain assumptions and then those also made things about assumptions, about G&A. But I think where I heard in one of your questions was that relationship with G&A and recurring fees. And I think the best way and this is how we're actually looking at it, and this was, what I was in answer to Gaurav's question is we buy an asset, we have the scale and the team that's in place under our current G&A that allows us to operate these assets, as well as add additional assets. Obviously, if we added 20 assets, we might end up needing more folks, but the additional incremental G&A on that is very small.

So if you buy that $50 million asset maybe you need another, you need a quarter [Phonetic] of an accountant, an eighth [Phonetic] of an AVP and property management, but the benefit of scale goes to the REIT, but yet the recurring fees go away. So, I don't know if that's -- that was one of the questions, I don't know if you wanted to repeat. I know the other one -- the next one you said, you said that it's included in our guidance, excluding internalization costs. And that is true. What we were -- what we were trying to say there. I don't want you to have the impression and if you do, you should dispel it, but that meant, well that guidance that we just didn't even think about the impacts of internalization or guidance, I mean clearly, we did.

What that is saying is that in the fourth quarter and excuse me, in the first quarter, which is actually the quarter in which the transaction closed, we'll have additional pursuit and due diligence, legal costs that went into the transaction, as well as the deployment of the capital itself, which in fairness is going to make for an interesting quarter on financial statements, because of how that has to all be accounted for, and as far as FFO and all those things. So, I think that's -- I just want to make sure, that's what you understand in our guidance, not that we didn't take it into account, and I'm sure Michael there were two or three questions in there. Happy to answer to it [Phonetic].

Michael Lewis -- SunTrust Robinson Humphrey -- Analyst

Yeah. That's helpful. Well, let me let me just kind of boil it down, maybe I should just ask one question. I mean, what's the primary driver, the primary drivers of why the FFO is going down so much? Is it lower interest income? Is it higher G&A? I mean, are there one or two things we could point to in our models that are, causing the decline?

Joel T. Murphy -- Chief Executive Officer

Yeah, I am going to let John walk through those at the beginning. I know we -- and again, apologies to those listening. We had that technical difficulty. John tried to recount it to restart from the beginning. So maybe all this wasn't heard or was lost in some of it. And John's going to go through again specifically some of that. But it's a combination of several factors. Clearly internalization is one of them. And John mentioned -- and Michael, you've always pointed out to us, sometimes to our chagrin, one-time events that occurred with us. The example that John gave was very productive sale of those and the ML assets in the fourth quarter, but those are one-time events. It may or may not occur in the subsequent years, so it's harder to match.

The relative size of the mezzanine loan book, the real estate investment loan book as it goes forward is a smaller piece of our deal. So the contribution to FFO from those on a relative basis is lower. So I think those are the major components. But John might be able to add some more color.

John Isakson -- Chief Financial Officer

So I think Joel's got it exactly right. I think the important thing to emphasize is just what Joel said, I mean, it is a combination, as I said at internalization and these one-time events. And as we go through the year, we're going to update -- we're going to update our guidance as appropriate and as we get the results and have a clearer picture for the rest of the year, we'll keep you up to date.

Michael Lewis -- SunTrust Robinson Humphrey -- Analyst

Okay. I don't want to monopolize, but I have two more quicker ones. On the dividend, is it fair to say that the dividend wasn't covered this year, you don't think it'll be covered next year? And when I look at your loan covenant for your credit facility, there's a dividend coverage covenant that was tight last quarter. Are you tight to that now? Or are you even in breach of it?

John Isakson -- Chief Financial Officer

We are -- it is tied, we are not in breach to that covenant. I'd make that clear. And you made a statement, you said, if we're -- if our dividend isn't covered this year, it won't be covered next year. What I would say is, I don't know that either one of those things are true and I wouldn't make either one of those statements today.

Michael Lewis -- SunTrust Robinson Humphrey -- Analyst

You don't know if it was covered this past year?

John Isakson -- Chief Financial Officer

No, no, no. I'm saying for this year and next year, I thought you meant this year and next year.

Michael Lewis -- SunTrust Robinson Humphrey -- Analyst

I'm sorry. I'm sorry. No, I said this year. Thank you. 2019, I'm behind. That's my fault.

Joel T. Murphy -- Chief Executive Officer

That's it. Michael, obviously in the fourth quarter we were inside. But again, that just kind of shows us, we can look at this. We look at it as a forward, we can look at it as a trailing 12 month, but it really does just point out the lumpiness of that AFFO number and it depends on things. Again, we laid out the amount of that actually accrued on our books as of 12/31.

And the reality that number that we gave actually might be a little light, because think about it, the loans that are still outstanding, as we're sitting here, while we're sitting here in this room this morning, we're jets generating more FFO for us and it's going to be generating more AFFO on the books as those loans gone to maturity. Okay.

So -- and we just showed in the first quarter that retail, one did pay off and put $2.7 million of AFFO on the books for the first quarter, but has yet to be reported. But it's hard for us because those are market dynamic. It's hard for us to anticipate, because those are owned by folks that we have these loans with and market issues are going to dictate when they sell, whether we buy it or whether they refinance this out.

Michael Lewis -- SunTrust Robinson Humphrey -- Analyst

Okay. And then lastly for me. I just wanted to ask you about this large Berryessa loan that matures in 2021. It has an 8.5% current yield. I don't know if it's early to think about how you backfill that or what that means to when that large loan matures?

Joel T. Murphy -- Chief Executive Officer

Yeah, I'm enjoying looking down the table at Jeff Sherman and asking him the same question, but the fact is, we've got a very active book. But look you bring the point that you raise is a valid thing that we think about it and we're very aware of, while the loan book if you will, the real estate investment loan book is relatively static in nature. It is dynamic -- at the same time and since it moves up and moves down, we get paid off, we make new mezzanine loans. It's very active in the marketplace. That deal has some timeline out ahead of us. And our goal is to be able to replace that.

But we're also at the same time very prudent, Michael, we know this might be on mezzanine or this type of loan. Our real estate investment loans might be light cycle. We just want to make sure that the benefits and good things that we saw in the real estate investment loan program that are near to our benefit during the early to mid-part of the cycle, that those are still available to us. And if they are available to us then we're going to do them. If they're not, we're not just going to move into that just to keep that mezzanine book happen.

Michael Lewis -- SunTrust Robinson Humphrey -- Analyst

Thank you for taking my questions. I appreciate it.

John Isakson -- Chief Financial Officer

Thanks, Michael.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Joel Murphy for any closing remarks.

Joel T. Murphy -- Chief Executive Officer

Hey, listen, thank you very much for joining us on our call today. We appreciate your interest in PAC and our Company. We appreciate the looks that you've made at our disclosures and everything that we're doing. We've enjoyed presenting this to you and I want to make sure you understand and I mean very much what I said in the very beginning mark, is that we welcome you to come visit us in Atlanta. John and I and other management of the team will be out visiting on the road to talk to you and communicate our strategy to you and we look forward to any further or additional phone call, follow-ups you'd like to make. So with that, I'll conclude our call. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Paul Cullen -- Executive Vice President and Chief Marketing Officer

Joel T. Murphy -- Chief Executive Officer

John Isakson -- Chief Financial Officer

Gaurav Mehta -- National Securities -- Analyst

Barry Oxford -- D.A. Davidson -- Analyst

Michael Lewis -- SunTrust Robinson Humphrey -- Analyst

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