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| PPS > SEC Filings for PPS > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
Cutting costs by reducing corporate overhead, gross development overhead and property management expenses,
Focusing the Company by evaluating the number of markets within which it operates, and the appropriate size of its development pipeline, and
Pursuing construction loan financing and joint venture equity to fund development activity.
Since the start of the third quarter of 2008, conditions in the global capital
markets and the U.S. economy have continued to deteriorate. The U.S. federal
government has nationalized government-sponsored mortgage entities, Fannie Mae
and Freddie Mac, and has taken other substantive actions to stabilize U.S.
financial institutions and the capital markets. In response to these events, the
Company has adjusted the timing of its strategic priorities by deferring further
substantive activities on its pre-development pipeline and by focusing on
maintaining the relative strength of its balance sheet and the liquidity
necessary to fund its operations, including its active pipeline of development
projects under construction and its near-term debt maturities. Since the start
of the third quarter of 2008, the Company has closed the sales of two apartment
communities for total gross proceeds of approximately $91,250 and has closed a
$184,683 secured portfolio financing with Freddie Mac. As a result, as of
October 31, 2008, the Company had approximately $597,000 of borrowing capacity
under its combined $630,000 unsecured revolving lines of credit and
approximately $110,000 of available cash equivalents. The status of the
Company's asset sales, development and cost savings initiatives are discussed in
further detail below.
Operations Overview
The Company's operating results have benefited from generally improved
fundamentals in the multifamily apartment market over the last several years,
although the rate of growth began moderating in 2007 and has continued into
2008. This is evidenced by a decrease in the year over year rate of growth in
same store operating revenues and property net operating income ("NOI") which
increased
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
2.1% and 1.1%, respectively, for the nine months ended September 30, 2008,
compared to 4.7% and 4.7%, respectively, for the full year of 2007. In the third
quarter of 2008, the year over year rate of growth in same store operating
revenues and NOI declined to 0.9% and 1.2%, respectively.
Recent events in the global capital markets discussed above have generated
significant concerns relating to a substantial economic slowdown in the U.S.,
including signs of declining job growth and severe tightening in the credit
markets. Historically, weaker economic conditions and declining job growth in
the U.S. and in the Company's markets has led to deteriorating, even negative,
revenue and NOI growth in the multifamily market. The overall tightening of the
credit markets and current conditions in the global capital markets and the U.S.
economy could also make it increasingly difficult for the Company to actively
pursue sales of its assets currently held for sale and will continue to
adversely impact the Company's ability to obtain joint venture or other
financing for its development projects while these conditions persist.
The multifamily market is also being impacted by a slowdown in the overall U.S.
housing market, attributable in part to continued concerns relating to the
impact of rising mortgage delinquencies, tighter credit markets and a rising
("shadow") supply of for-sale multifamily product entering the rental market.
Based on the above factors, the Company is forecasting a decline in same store
community revenues and NOI for the fourth quarter of 2008, as compared to 2007,
and as more fully discussed in the "Outlook" section below. If the U.S. economy
has entered into a recession, the Company believes that apartment fundamentals
will be adversely affected.
The Company's operating results for the nine months ended September 30, 2008
also reflect approximately $2,591 of severance charges related to the
elimination of 40 property management, landscaping, corporate and development
employment positions as of September 30, 2008, and certain other positions
though attrition. These charges are consistent with the Company's objective to
reduce overhead expenses, and the Company currently expects that the elimination
of these positions will reduce overhead costs prospectively on an annual basis
by approximately $4 million. There can be no assurance that the Company will not
recognize additional severance charges in future periods or that the anticipated
overhead savings will be achieved.
The Company has been active over the past several years in repositioning its
real estate portfolio and building its development and value creation
capabilities centered upon its Southeast, Southwest and Mid-Atlantic regions.
During this time, the Company has been a net seller of apartment assets in an
effort to exploit opportunities to harvest value and recycle capital through the
sale of non-core assets that no longer meet the Company's growth objectives. The
Company's asset sales program has been consistent with its strategy of reducing
its concentration in Atlanta, Georgia and Dallas, Texas, building critical mass
in fewer markets and leveraging the Postฎ brand in order to improve operating
efficiencies. The Company has redeployed capital raised from its asset sales to
strengthen its balance sheet, by reducing high-coupon preferred equity and debt,
and by reinvesting in assets that the Company believes demonstrate better growth
potential. In this regard, the Company disposed of 807 apartment units in 2007
and 887 units in 2008 through October for aggregate gross proceeds of
approximately $91,800 and $111,100, respectively. In 2007, the Company also
transferred three communities, containing 1,202 apartment units, to a newly
formed unconsolidated entity, in which the Company retained a 25% interest. The
75% interest in these communities effectively sold to the institutional partner
generated gross proceeds of approximately $136,200.
Currently, the Company continues to market for sale six other apartment
communities. The communities, comprising 1,871 apartment units, include three
communities located in Atlanta, Georgia, one community located in the northern
Virginia submarket of greater Washington, D.C., and the Company's only two
communities located in New York City. The Company currently expects to use net
proceeds to fund its committed investments, repay debt, pay potential special
dividends, if necessary, or possibly to repurchase shares of its stock. Gross
proceeds that may potentially be realized by the Company from the sales of these
six communities are currently expected to be approximately $360,000, although
current conditions in the global capital markets and the U.S. economy discussed
above may adversely affect the Company's ability to sell assets, making it
difficult for potential buyers to obtain financing at attractive terms or at
all. As a result, there can be no assurance that the potential gross proceeds
will be realized by the Company, used for the purposes intended or that these
assets will be sold.
As more fully described in "Current Development Activity" later in this Item 2,
in the second quarter of 2008, the Company made a decision to defer further
activities on four of its development projects and to abandon the pursuit of
certain other development projects in light of difficult market conditions. The
total projected development costs of these projects totaled more than $430,000.
As a result, the Company recognized impairment charges for the nine months ended
September 30, 2008 of $28,947 to write down these four projects to fair market
value and to write off pursuit costs on abandoned projects.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
In response to current conditions in the global capital markets and the U.S.
economy discussed above, the Company also deferred substantive activities in the
third quarter on its remaining pre-development pipeline totaling six projects.
The total projected development costs of these projects totaled approximately
$380,000. At present, management believes that the timing of future development
starts will depend largely on the stabilization of capital market conditions and
the U.S. economy, which it believes will influence conditions in employment and
the local real estate markets, the Company's ability to generate asset sales
proceeds and its ability to attract potential construction loan financing and
joint venture equity to fund future development. Until such time as substantive
development activities re-commence or certain land positions are sold, the
Company expects that operating results will be adversely impacted by costs of
carrying land held for future development or sale.
As of September 30, 2008, the Company's aggregate pipeline of development
projects under construction totaled approximately $541,500 (including the
Company's share, net of joint venture partner interests, of $507,200). As of the
same date, approximately $265,800 of estimated construction costs remained to be
funded by the Company (or approximately $219,000, excluding committed
construction loan financing and escrow deposits held by the construction
lender). The Company expects to fund future estimated construction expenditures
primarily by utilizing available cash equivalents, totaling approximately
$110,000, and borrowing capacity under its unsecured revolving lines of credit
totaling approximately $597,000 as of October 31, 2008.
Based on the factors discussed above, there can be no assurance that projects in
pre-development will commence construction in the future or at all or that
actual development costs will approximate estimated costs. Should the Company
further change its expectations regarding the timing and projected undiscounted
future cash flows expected from projects in pre-development or land held for
future development, the Company may be required to recognize additional
impairment losses in future periods. Should the Company change its current
estimates of the fair value of assets held for sale to below their carrying
values, the Company may also be required to recognize additional impairment
losses in future periods.
In early 2005, the Company entered the for-sale condominium housing market to
exploit the strategic opportunity for Post to serve those consumers who are
choosing to own, rather than rent, their home. In total, the Company has
converted five apartment communities since 2005, initially consisting of 731
units (including one held in a joint venture), into for-sale condominium homes.
As of the end of the third quarter of 2008, three of these condominium
conversion projects were sold out. The other two projects, containing a total of
349 units, had on average closed the sales of approximately 76.2% of their total
units as of October 27, 2008. Beginning in the second quarter of 2007, the
Company also began closing condominium homes at two of its newly developed
for-sale condominium projects, containing 230 homes. As of October 27, 2008, the
Company had on average closed the sales of approximately 81.7% of the total
units at these two communities. The Company expects closings at these
communities to continue, although slowly, through the fourth quarter of 2008 and
into 2009. Beginning in 2007 and continuing presently, there has been a
softening in the condominium and single family housing markets due to increasing
supply, weak consumer confidence, tighter credit markets for home purchasers,
which the Company believes has negatively impacted the ability of prospective
condominium buyers to qualify for mortgage financing, and a significant slow
down in the residential housing market in the U.S. Further, as a result of the
turmoil in the global capital markets and a slowdown in the U.S. economy
discussed above, the for-sale housing markets are likely to continue to be weak
and may even deteriorate further. As a result, condominium closings are likely
to be slow at these communities for the remainder of 2008 and into 2009.
The Company implemented reduced pricing programs in 2008 in an effort to reduce
its unsold condominium inventory at its four completed projects. These reduced
pricing programs have generally resulted in lower condominium profits in 2008
compared to prior years. There can be no assurance of the amount or pace of
future for-sale condominium sales and closings. As discussed in Note 1 to the
consolidated financial statement contained herein, the Company uses the relative
sales value method to allocate costs and recognize profits from condominium
projects. This method requires the Company to estimate its total condominium
profits costs and profits each period. Should the Company further adjust its
estimates regarding costs and profits expected to be realized from its
condominium projects in future periods, the Company may recognize additional
losses in subsequent periods to reduce estimated profits previously recorded or
may recognize impairment losses if the carrying value of these assets is not
deemed recoverable.
The Company's expansion into for-sale condominium housing exposes the Company to
additional risks and challenges, which if they materialize, could have an
adverse impact on the Company's business, results of operations and financial
condition. As of September 30, 2008, the Company had approximately $232,100 of
total estimated capital cost (based on book value and including the Company's
investment in unconsolidated entities) committed to its for-sale condominium
conversion and ground-up development projects, including the Company's share of
projected development costs expected to be funded relating to for-sale projects
currently under construction and held for sale. See "Risk Factors" in the
Company's Form 10-K, as amended, for the year ended December 31, 2007 (the
"Form 10-K") and in Item 1A of this Form 10-Q for a discussion of these and
other Company risk factors.
The following discussion should be read in conjunction with the selected
financial data and with all of the accompanying consolidated financial
statements appearing elsewhere in this report. This discussion is combined for
the Company and the Operating Partnership as
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
their results of operations and financial condition are substantially the same
except for the effect of the 0.7% weighted average common minority interest in
the Operating Partnership. See the summary financial information in the section
below titled, "Results of Operations."
Disclosure Regarding Forward-Looking Statements
Certain statements made in this report, and other written or oral statements
made by or on behalf of the Company, may constitute "forward-looking statements"
within the meaning of the federal securities laws. In addition, the Company, or
the executive officers on the Company's behalf, may from time to time make
forward-looking statements in reports and other documents the Company files with
the SEC or in connection with oral statements made to the press, potential
investors or others. Statements regarding future events and developments and the
Company's future performance, as well as management's expectations, beliefs,
plans, estimates or projections relating to the future, are forward-looking
statements within the meaning of these laws. Forward-looking statements include
statements proceeded by, followed by or that include the words "believes,"
"expects," "anticipates," "plans," "estimates," or similar expressions. Examples
of such statements in this report include expectations with respect to the
Company's strategies to enhance shareholder value, the Company's anticipated
performance for the remainder of 2008 (including the Company's assumptions for
such performance and expected levels of costs and expenses to be incurred in
2008), anticipated apartment community sales in 2008 (including estimated
proceeds, estimated gains on sales and the use of proceeds from such sales),
anticipated conversion of apartment communities into condominium homes,
development of new for-sale condominium housing and the related sales of the
for-sale condominium homes, anticipated future acquisition and development
activities (including projected costs, timing and anticipated potential sources
of financing), anticipated costs and timing to remediate and improve apartment
communities with stucco and EIFS exteriors, accounting recognition and
measurement of guarantees, anticipated refinancing and other new financing
needs, the anticipated dividend level in 2008, the Company's ability to meet new
construction, development and other long-term liquidity requirements, expected
overhead and severance expenses, its ability to execute future asset sales,
expected impact that a resolution of any legal proceeding may have on the
Company, anticipated impact of a U.S. recession on the Company, the Company's
ability under its credit facilities to execute the remainder of its 2008
business plan and to meet its short term liquidity requirements and expected
enhancement in value of the Company's properties currently in rehabilitation.
Forward-looking statements are only predictions and are not guarantees of
performance. These statements are based on beliefs and assumptions of the
Company's management, which in turn are based on currently available
information. Important assumptions relating to the forward-looking statements
include, among others, assumptions regarding the market for the Company's
apartment communities, demand for apartments in the markets in which it operates
competitive conditions and general economic conditions. These assumptions could
prove inaccurate. The forward-looking statements also involve risks and
uncertainties, which could cause actual results to differ materially from those
contained in any forward-looking statement. Many of these factors are beyond the
Company's ability to control or predict. Such factors include, but are not
limited to, the following:
The success of the Company's business strategies described on pages 2 to 3 of
the Form 10-K and those discussed under "Conclusion of Strategic Process and
Strategies to Enhance Shareholder Value" in this Management Discussion and
Analysis of Financial Condition and Results of Operations;
Future local and national economic conditions, including changes in job growth, interest rates, the availability of mortgage and other financing and related factors;
Uncertainties associated with the global capital markets, including the continued availability of traditional sources of capital and liquidity and related factors;
Demand for apartments in the Company's markets and the effect on occupancy and rental rates;
The impact of competition on the Company's business, including competition for residents in the Company's apartment communities and buyers of the Company's for-sale condominium homes and development locations;
The uncertainties associated with the Company's real estate development, including actual costs exceeding the Company's budgets or development periods exceeding expectations;
Uncertainties associated with the timing and amount of apartment community sales, the market for such sales and the resulting gains/losses associated with such sales;
The Company's ability to enter into new joint ventures and the availability of equity financing from traditional real estate investors to fund development activities;
The Company's ability to obtain construction loan financing to fund development activities;
Uncertainties associated with the Company's condominium conversion and for-sale housing business, including the timing and volume of condominium sales;
Uncertainties associated with loss of personnel in connection with the Company's reduction of corporate and property development and management overhead;
Conditions affecting ownership of residential real estate and general conditions in the multi-family residential real estate market;
Uncertainties associated with environmental and other regulatory matters;
The impact of the Company's ongoing litigation with the Equal Rights Center regarding the Americans with Disabilities Act and the Fair Housing Act (including any award of compensatory or punitive damages or injunctive relief requiring the Company to
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
retrofit apartments or public use areas or prohibiting the sale of apartment
communities or condominium units) as well as the impact of other litigation;
The effects of changes in accounting policies and other regulatory matters detailed in the Company's filings with the Securities and Exchange Commission and uncertainties of litigation;
The Company's ability to continue to qualify as a REIT under the Internal Revenue Code; and
Other factors, including the risk factors discussed in Item 1A of the Form 10-K and Item 1A of this Form 10-Q.
Management believes these forward-looking statements are reasonable; however,
undue reliance should not be placed on any forward-looking statements, which are
based on current expectations. Further, forward-looking statements speak only as
of the date they are made, and management undertakes no obligation to update
publicly any of them in light of new information or future events.
Critical Accounting Policies and New Accounting Pronouncements
In the preparation of financial statements and in the determination of Company
operating performance, the Company utilizes certain significant accounting
polices. The Company's significant accounting policies are included in the notes
to the Company's consolidated financial statements included in the Company's
Annual Report on Form 10-K, as amended, for the year ended December 31, 2007.
The Company's critical accounting policies are those that require application of
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods. For a complete description of
the Company's critical accounting policies, please refer to pages 28 and 29 of
the Form 10-K. There were no significant changes to the Company's critical
accounting policies and estimates during the nine months ended September 30,
2008. The discussion below addresses the implementation and impact of recently
issued and adopted accounting pronouncements with an impact on the Company for
the nine months ended September 30, 2008 or that may have an impact on future
reported results.
SFAS No. 157, "Fair Value Measurements," was issued in September 2006. SFAS
No. 157 provides a definition of fair value and establishes a framework for
measuring fair value. SFAS No. 157 clarified the definition of fair value in an
effort to eliminate inconsistencies in the application of fair value under
generally accepted accounting principles. Additional disclosure focusing on the
methods used to determine fair value is also required. The Company adopted SFAS
No. 157 on January 1, 2008, specifically related to the valuation of the
Company's derivative instrument at fair value and the Company's impairment
valuation analysis related to real estate assets. The valuations were made using
observable and unobservable market data for similar instruments and assets.
SFAS No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities - including an amendment of FASB Statement No. 115," was issued in
February 2007. SFAS No. 159 gives the Company the irrevocable option to carry
most financial assets and liabilities at fair value, with changes in fair value
recognized in earnings. The Company adopted SFAS No. 159 on January 1, 2008, and
the adoption did not have a material impact on the Company's financial position
and results of operations. The Company did not elect to record any of its
financial assets and liabilities at fair value in 2008 that were not recorded as
such under existing accounting pronouncements.
. . .
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