Equity Compensation

9 Months Ended

Sep. 30, 2020

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

Equity Compensation

Stock Incentive Plan

On May 2, 2019, the Company’s board of directors adopted, and the Company’s Common stockholders approved, the Preferred Apartment Communities, Inc. 2019 Stock Incentive Plan, or the 2019 Plan, to incentivize, compensate and retain eligible officers, consultants, and non-employee directors. The 2019 Plan increased the aggregate number of shares of Common Stock authorized for issuance under the 2011 Plan from 2,617,500 to 3,617,500. The 2019 Plan does not have a stated expiration date.

Equity compensation expense by award type for the Company was:


(In thousands)	Three-month periods ended September 30,				Nine-month periods ended September 30,				Unamortized expense as of September 30,
	2020		2019		2020		2019		2020

Class B Unit awards to employees:
2016	$	—	$	—	$	—	$	2	$	—
2017	—		78		3		234		—
2018	70		72		191		215		71
Restricted stock grants to Board members:
2018	—		—		—		120		—
2019	—		106		140		176		—
2020	133		—		222		—		310
Restricted stock grants for employees:
2020	242		—		279		—		3,601
Performance-based restricted stock units:
2020	92		—		92		—		1,753
Restricted stock units to employees:
2017	—		15		—		53		—
2018	14		15		38		55		19
2019	16		19		47		67		94
2020	15		—		46		—		137

Total	$	582	$	305	$	1,058	$	922	$	5,985

Performance-based Restricted Stock Unit Grants

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

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


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

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

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

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


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

Target number of PSUs granted:
First vesting tranche	136,462
Second vesting tranche	136,467
	272,929

Calculated fair value per PSU	$	6.76

Total fair value of PSUs	$	1,845,000

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

The Company's own stock price history over the 2.91 year period trailing the grant date was utilized as the expected volatility assumption.

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

Restricted Stock Grants

The following annual grants of restricted stock were made to members of the Company's independent directors, as payment of the annual retainer fees. The restricted stock grants for service years 2017-2019 vested (or are scheduled to vest) on a pro-rata basis over the four consecutive 90-day periods following the date of grant. The restricted stock grant for service year 2020 is scheduled to vest on the one-year anniversary of the date of grant.


Service year	Shares	Fair value per share		Total compensation cost (in thousands)
2017	24,408	$	14.75	$	360
2018	24,810	$	14.51	$	360
2019	26,446	$	15.88	$	420
2020	66,114	$	8.05	$	532

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

Class B OP Units

As of September 30, 2020, cumulative activity of grants of Class B Units of the Operating Partnership, or Class B OP units, was:


	Grant date
	1/2/2018	1/3/2017

Units granted	256,087	286,392
Units forfeited:
John A. Williams (1)	(38,284)	—
Voluntary forfeiture by senior executives (2)	(128,258)	—
Other	(24,237)	(5,334)

Total forfeitures	(190,779)	(5,334)

Units earned and converted into Class A Units	—	(281,058)

Class B Units outstanding at September 30, 2020	65,308	—

Units unearned but vested	48,678	—
Units unearned and not yet vested	16,630	—

Class B Units outstanding at September 30, 2020	65,308	—

(1) Pro rata modification of award on April 16, 2018, the date of Mr. Williams' passing.
(2) Additional Class B OP units granted to senior executives other than Mr. Williams were voluntarily forfeited at the end of 2018.

There were no grants of Class B OP Units for 2019 or 2020.

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


Grant date	1/2/2018
Stock price	$	20.19
Dividend yield	4.95		%
Expected volatility	25.70		%
Risk-free interest rate	2.71		%

Number of Units granted:
One year vesting period	171,988
Three year vesting period	84,099
	256,087

Calculated fair value per Unit	$	16.66

Total fair value of Units	$	4,266,409

Target market threshold increase	$	5,660,580

The expected dividend yield assumptions were derived from the Company’s closing prices of the Common Stock on the grant dates and the projected future quarterly dividend payments per share of $0.25 for the 2018 awards.

For the 2018 awards, the Company's own stock price history was utilized as the basis for deriving the expected volatility assumption.

The risk-free rate assumptions were obtained from the Federal Reserve yield table and were calculated as the interpolated rate between the 20 and 30 year yield percentages on U. S. Treasury securities on the grant date.

Since the Class B OP Units have no expiration date, a derived service period of one year was utilized, which equals the period of time from the grant date to the initial valuation date.

Restricted Stock Units

The Company, made grants of restricted stock units, or RSUs, to its employees under the 2019 Plan, and prior to Internalization, made grants of RSUs to certain employees of affiliates of the Company under the 2011 Plan, as shown in the following table:


Grant date	1/2/2020		1/2/2019		1/2/2018
Service period	2020-2022		2019-2021		2018-2020

RSU activity:
Granted	21,400		27,760		20,720
Forfeited	(2,100)		(6,581)		(6,874)

RSUs outstanding at September 30, 2020	19,300		21,179		13,846

RSUs unearned but vested	—		7,141		9,306
RSUs unearned and not yet vested	19,300		14,038		4,540

RSUs outstanding at September 30, 2020	19,300		21,179		13,846

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

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 of the number of shares of Common Stock at the date of grant is compared to the market capitalization of the same number of shares of Common Stock at the Initial Valuation Date. If the market capitalization measure results in an increase which exceeds the target market threshold, the Vested RSUs become earned RSUs and are settled in shares of Common Stock on a one-to-one basis. Vested RSUs may become Earned RSUs on a pro-rata basis should the result of the market capitalization test be an increase of less than the target market threshold. Any Vested RSUs that do not become Earned RSUs on the Initial Valuation Date are subsequently remeasured on a quarterly basis until such time as all Vested RSUs become Earned RSUs or are forfeited due to termination of continuous service due to an event other than as a result of a qualified event, which is generally the death or disability of the holder. Continuous service through the final valuation date is required for the Vested RSUs to qualify to become fully Earned RSUs.

Because RSUs are valued using the identical market condition vesting requirement that determines the transition of the Vested Class B Units to Earned Class B Units, the same valuation assumptions per RSU were utilized to calculate the total fair values of the RSUs. The total fair value amounts pertaining to grants of RSUs, net of forfeitures, are amortized as compensation expense over the three one-year periods ending on the three successive anniversaries of the grant dates.