Equity Compensation

12 Months Ended

Dec. 31, 2021

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 stockholders approved, the Preferred Apartment Communities, Inc. 2019 Stock Incentive Plan, or the 2019 Plan, to incentivize, compensate and retain eligible officers, employees, 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. In 2021, the Company's board of directors adopted, and the Company's stockholders approved, an amendment to the 2019 Plan to increase the number of shares that can be awarded by 1,900,000 shares.

Equity compensation expense by award type for the Company was:


	Years ended December 31,						Unamortized expense as of December 31, 2021
(In thousands)	2021		2020		2019

Class B Unit awards to employees:
2016	$	—	$	—	$	2	$	—
2017	—		3		312		—
2018	—		244		277		—
Restricted stock grants to Board members:
2018	—		—		120		—
2019	—		140		281		—
2020	177		355		—		—
2021	284		—		—		234
Restricted stock grants for employees:
2020	939		522		—		2,241
2021	510		—		—		2,067
Performance-based restricted stock units:
2020	499		230		—		991
2021	729		—		—		2,233
Restricted stock units to employees:
2017	—		—		69		—
2018	(2)		35		74		—
2019	60		57		88		—
2020	41		58		—		48
2021	52		—		—		145

Total	$	3,289	$	1,644	$	1,223	$	7,959

Performance-based Restricted Stock Unit Grants

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

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


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

The number of PSUs that become earned PSUs can range between 0% and 200% of the original (target) number of PSUs awarded 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, performed by an independent third party advisor, 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:


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

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

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

Calculated fair value per PSU	$	15.24		$	6.76

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

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

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

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

A total of 12,639 and 18,491 PSUs from the 2021 and 2020 grants, respectively, were forfeited during the year ended December 31, 2021.

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 2018 and 2019 vested on a pro-rata basis over the four consecutive 90-day periods following the date of grant. The restricted stock grants for service years 2020 and 2021 are scheduled to vest on the earlier of our next annual meeting of stockholders or the one-year anniversary of the date of grant.


Service year	Shares	Fair value per share	Total compensation cost (in thousands)
2018	24,810	$14.51	$360
2019	26,446	$15.88	$420
2020	66,114	$8.05	$532
2021	46,782	$10.26	$480

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

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

Class B OP Units

As of December 31, 2021, cumulative activity of grants of Class B Units of the Operating Partnership, or Class B OP units, was:


Grant date						1/2/2018

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

Total forfeitures						(197,621)

Units earned and converted into Class A Units						—

Class B Units outstanding at December 31, 2021						58,466

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

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 has granted restricted stock units, or RSUs, to certain employees of affiliates of the Company, as shown in the following table:


Grant date	3/15/2021		1/2/2020		1/2/2019		1/2/2018
Service period	2021-2024		2020-2022		2019-2021		2018-2020

RSU activity:
Granted	20,600		21,400		27,760		20,720
Forfeited	(2,200)		(5,900)		(8,861)		(8,274)

RSUs outstanding at December 31, 2021	18,400		15,500		18,899		12,446

RSUs unearned but vested	—		5,188		12,683		12,446
RSUs unearned and not yet vested	18,400		10,312		6,216		—

RSUs outstanding at December 31, 2021	18,400		15,500		18,899		12,446

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

The RSUs vest in three equal consecutive one-year tranches from the date of grant. For each grant prior to March 15, 2021, on the Initial Valuation Date, the market capitalization of the number of shares of Common Stock at the date of grant is compared to the market capitalization of the same number of shares of Common Stock at the Initial Valuation Date. If the market capitalization measure results in an increase which exceeds the target market threshold, the Vested RSUs become earned RSUs and are settled in shares of Common Stock on a one-to-one basis. Vested RSUs may become Earned RSUs on a pro-rata basis should the result of the market capitalization test be an increase of less than the target market threshold. Any Vested RSUs that do not become Earned RSUs on the Initial Valuation Date are subsequently remeasured on a quarterly basis until such time as all Vested RSUs become Earned RSUs or are forfeited due to termination of continuous service due to an event other than as a result of a qualified event, which is generally the death or disability of the holder. Continuous service through the final valuation date is required for the Vested RSUs to qualify to become fully Earned RSUs. RSUs issued on March 15, 2021 may become vested subject only to satisfaction of the service requirement.

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