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| PPS > SEC Filings for PPS > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited, in thousands, except per share or unit and apartment unit data)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(In thousands, except apartment unit data)
Company Overview
Post Properties, Inc. and its subsidiaries develop, own and manage upscale multi-family communities in selected markets in the United States. As used in this report, the term "Company" includes Post Properties, Inc. and its subsidiaries, including Post Apartment Homes, L.P. (the "Operating Partnership"), unless the context indicates otherwise. The Company, through its wholly-owned subsidiaries is the general partner and owns a majority interest in the Operating Partnership which, through its subsidiaries, conducts substantially all of the on-going operations of the Company. At September 30, 2009, the Company owned 19,864 apartment units in 55 apartment communities, including 1,747 apartment units in five communities held in unconsolidated entities and 1,429 apartment units in four communities currently under construction and/or in lease-up. The Company is also developing and selling 277 luxury for-sale condominium homes in two communities (including 129 units in one community held in an unconsolidated entity) and is completing the sell out of units in three other condominium communities through a taxable REIT subsidiary. At September 30, 2009, approximately 36.5%, 22.4%, 11.5% and 11.2% (on a unit basis) of the Company's operating communities were located in the Atlanta, Dallas, the greater Washington D.C. and Tampa metropolitan areas, respectively.
The Company has elected to qualify and operate as a self-administrated and self-managed real estate investment trust ("REIT") for federal income tax purposes. A REIT is a legal entity which holds real estate interests and is generally not subject to federal income tax on the income it distributes to its shareholders.
At September 30, 2009, the Company owned approximately 99.6% of the common limited partnership interests ("Common Units") in the Operating Partnership. Common Units held by persons other than the Company represented a 0.4% common minority interest in the Operating Partnership.
Operations Overview
As a result of events in the global capital markets and the U.S. economy, including a severe tightening in the credit markets, increasing unemployment and declining consumer confidence, the Company observed a significant decline in economic growth in the U.S. that is expected to continue for the remainder of 2009. Historically, weaker economic conditions and declining job growth in the U.S. and in the Company's markets has led to deteriorating, and negative, revenue and NOI growth in the multi-family market. Further, the multi-family market is being adversely impacted by a substantial decline in the overall U.S. housing market, attributable in part to continued concerns relating to the impact of rising mortgage delinquencies and foreclosures, tighter credit markets and a rising "shadow" supply of for-sale multi-family product entering the rental market. Based on the above factors, the Company is forecasting a continued decline in same store community revenues and NOI for the fourth quarter and full year of 2009 as more fully discussed in the "Outlook" section below. If the recession in the U.S. economy worsens or continues beyond 2009, the Company's operating results would be adversely affected. In addition, 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 assets and will continue to adversely impact the Company's ability to obtain joint venture or other financing for development projects while these conditions persist.
Consistent with the factors described above, the Company's operating results experienced a decrease in the year over year rate of growth in same store operating revenues of 3.7% for the nine months ended September 30, 2009, compared to an increase of 1.4% for the full year of 2008. As partially offset by favorable variances in property operating expenses, same store net operating income ("NOI") also declined 3.3% for the first nine months of 2009, compared to the first nine months of 2008. Further, the decrease in the year over year rate of growth in same store revenues and net operating income accelerated throughout 2009 with the third quarter of 2009 reporting a 6.0% and 10.0% rate of decline, respectively, compared to the third quarter of 2008. The revenue decreases were largely attributable to declining rental rates, which on a year over year basis decreased 5.5% in the third quarter of 2009, compared to the third quarter of 2008. The Company also expects that same store revenues will continue to decline on a year-over-year basis in the fourth quarter of 2009 and into 2010, as new leases turnover at lower market rental rates.
In 2008, the Company reduced its headcount approximately 15%, including an approximately 25% reduction in headcount in corporate office positions, through a combination of asset sales, out-sourcing, attrition and elimination of positions. The Company also implemented a salary freeze for associates with base salaries greater than $50, substantially reduced bonuses, including eliminating any incentive bonus for 2008 for the Company's President and CEO, reduced long-term incentive awards
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited, in thousands, except per share or unit and apartment unit data)
for executive officers for 2008 and reduced targeted long-term incentives for 2009. In addition, at his request, compensation paid to the Chairman of the Company's Board of Directors was substantially reduced for 2008 and waived entirely for 2009. In the third quarter of 2009, the Company initiated further headcount reductions affecting a total of 17 primarily investment and development and property management positions. There can be no assurance that the Company will not recognize additional severance charges in future periods.
At September 30, 2009, the Company did not have any communities being marketed
for sale. In July 2009, the Company sold two communities containing 768 units:
one community located in Atlanta, Georgia and one community located in the
northern Virginia submarket of greater Washington, D.C. These two community
sales generated aggregate gross proceeds of approximately $102,300. A third
community, containing 530 units, was sold in April 2009 for a gross sales price
of approximately $47,400. Those proceeds were utilized in a manner consistent
with the Company's liquidity and balance sheet strategy discussed below.
In 2008, the Company made the decision to defer further substantive activities on all of its pre-development projects and to abandon the pursuit of certain other development projects in light of difficult market conditions. Additionally, during 2008, management evaluated its current expectations regarding the timing and projected undiscounted future cash flows from land held for future development (including the Company's expectations of possible future uses, capitalization rates, investors' return expectations, rental rates and operating cash flows) and reduced its expectations regarding the estimated fair values of its land holdings. As a result, the Company recorded non-cash impairment charges in 2008 to write-down a substantial portion of its land held for sale and land held for future investment (including the Company's interest in a joint venture that holds land for future investment) to estimated fair market value. After considering the impact of these impairment charges, which on a cumulative basis represented an approximately 47% reduction to the original aggregate carrying values of its land assets, the Company's land held for future investment and sale totaled approximately $98,920 at September 30, 2009.
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 investment or sale.
Based on the factors discussed above, there can be no assurance that land held for investment will be developed in the future or at all. Should the Company further change its expectations regarding the timing and projected undiscounted future cash flows expected from land held for future investment, 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.
As of September 30, 2009, the Company's aggregate pipeline of development projects under construction (apartments and condominiums) and in lease-up (before the impact of impairment charges described below) totaled approximately $486,700. As of the same date, approximately $100,000 of estimated construction costs remained to be funded, including retainage and construction payables, by the Company. In addition, the Company is underway with an initiative to remediate communities with stucco exteriors or exterior insulation finishing systems ("EIFS"). The Company currently estimates that the aggregate cost of this initiative will be approximately $45,000, of which approximately $23,863 has been incurred through September 30, 2009. The Company expects to fund future estimated construction and remediation expenditures primarily by utilizing available cash and cash equivalents and borrowing capacity under its unsecured revolving lines of credit and under a construction loan. The Company has discussed funding and other terms and conditions of the construction loan with its lenders. These discussions are ongoing and may, among other things, impact how construction expenditures relating to the underlying mixed-use development held by an unconsolidated entity are funded in the future. See "Liquidity and Capital Resources" below where discussed further.
In early 2005, the Company entered the for-sale condominium housing market and has since converted five apartment communities totaling 731 units into for-sale condominium homes, completed the construction of two condominium communities totaling 230 units, and is in the process of developing two luxury condominium projects: The Ritz-Carlton Residences, Atlanta, Buckhead (the "Atlanta Condominium Project"), consisting of 129 units, and The Four Seasons Residences in Austin, Texas (the "Austin Condominium Project"), consisting of 148 units, which are both currently expected to begin delivering completed units in the first quarter of 2010.
The Company's expansion into for-sale condominium housing exposes the Company to additional risks and challenges, including potential future losses or impairments, which could have an adverse impact on the Company's business, results of operations and financial condition. See "Risk Factors" in the Company's Form 10-K for the year ended December 31, 2008 (the "Form 10-K") for a discussion of these and other Company risk factors.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited, in thousands, except per share or unit and apartment unit data)
Of the above-described condominium conversions and completed condominium developments, there are 13 remaining units at two communities that remain unsold and are not under contract for sale as of October 26, 2009. One community completed its sell out during the fourth quarter of 2009. The carrying value of the Company's remaining unsold condominium units at these communities is less than $5,000. There can be no assurance that units under contract for sale will actually close.
The aggregate projected capital cost of the Atlanta Condominium Project and the Austin Condominium Project is approximately $250,000, of which approximately $59,503 of costs remained to be incurred as of September 30, 2009. Additionally, of the total projected investment, approximately $74,700 was deemed impaired and written down as an impairment charge during the second quarter of 2009, as described further below, which the Company currently projects will result in an aggregate net carrying value of approximately $175,000 for these two condominium developments when complete. There can be no assurances, however, that actual costs will not exceed these estimates or that additional impairment charges will not be recorded in subsequent periods as described further below. As of October 26, 2009, the Company had 72 units under contract at the Austin Condominium Project and had no units under contract at the Atlanta Condominium Project. There can be no assurance that units under contract for sale will actually close.
Beginning in 2007 and continuing presently, the Company has observed a substantial decline in the condominium and single family housing markets due to increasing supplies of such assets, 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. In response, the Company implemented price reductions in 2008 and 2009 in an effort to reduce its unsold condominium inventory at its completed and active for-sale projects. These reduced pricing programs have generally resulted in lower condominium profits compared to prior years. There can be no assurance of the amount or pace of future for-sale condominium sales and closings. However, the Company does expect that condominium closings will likely continue to be slow for the remainder of 2009 and into 2010. As discussed in Note 1 to the consolidated financial statements contained herein, the Company uses the relative sales value method to allocate costs and recognize profits from condominium projects, which requires the Company to estimate its total condominium costs and profits each period. Thus, price reductions for condominium units have adversely impacted profits realized from sales of condominiums to date and will continue to do so in future periods.
Since the beginning of 2009, the Company has observed a continued worsening of conditions in the U.S. economy and the housing markets, generally, and in the Atlanta upper-end single family and condominium markets, specifically, including the price discounting of competitive products in the Atlanta/Buckhead market. In addition, the government-sponsored mortgage agencies have imposed tighter restrictions on mortgage lending to condominium projects which the Company believes may adversely impact sales at its two luxury condominium developments. As such, in the second quarter of 2009, management revised its expectations regarding the timing and projected future cash flows from its condominium projects under development, and as a result, recorded non-cash impairment charges of approximately $76,317 (net of noncontrolling interests of $8,074) for the nine months ended September 30, 2009 to write-down the carrying value of its investment in the Atlanta Condominium Project joint venture development and adjacent land. The estimated fair value of the condominium project was derived from the present value of the Company's estimated future cash flows using a 23% discount rate. The Company's cash flow assumptions reflect reduced list prices for the condominium units and also assume an extended sell out period, consistent with current market conditions. Although management concluded that no additional impairment existed under generally accepted accounting principles as of September 30, 2009, the Company has continued to experience downward pressure on condominium prices for this project and for luxury for-sale condominium product in the Atlanta/Buckhead submarket in general, which may further adversely impact the estimated fair value of this project.
The Company also evaluated the Austin Condominium Project for impairment as of June 30, 2009 but concluded that the project was not deemed impaired under generally accepted accounting principles as of that date because the projected future undiscounted cash flows exceeded the carrying value of the asset. The Company similarly concluded that no impairment existed under generally accepted accounting principles as of September 30, 2009. Notwithstanding, had the Company applied the same 23% discount rate to calculate the present value of the estimated future cash flows, the Company estimated that fair value of the Austin Condominium Project would have been approximately $35,000 less than its carrying value as of June 30, 2009. As a result, if current cash flow assumptions were to remain unchanged, the Company's analysis indicates that it would likely be required to record an impairment charge for this asset when it becomes substantially complete and considered "held for sale" in or around the first quarter of 2010. Additionally, if the Company's projections of future undiscounted cash flows were to indicate in future quarters that the carrying value of the asset was not deemed recoverable prior to substantial completion, it is possible that the Company would be required to record an impairment charge in an earlier future period. There can be no assurance that the Company's cash flow projections will not change in future periods, that the estimated fair
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited, in thousands, except per share or unit and apartment unit data)
value of the Austin Condominium Project will not change in the future as a consequence, or that any impairment of this asset will actually be realized.
In general, should the Company further adjust its estimates regarding costs and profits expected to be realized from its condominium projects in future periods, or change its estimates regarding future cash flows or fair value, the Company may recognize additional losses in subsequent periods to reduce estimated profits previously recorded or may recognize additional impairment losses if the carrying value of these assets is not deemed recoverable.
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 their results of operations and financial condition are substantially the same except for the effect of the 0.5% 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 preceded by, followed by or that include the words "believes," "expects," "anticipates," "plans," "estimates," or similar expressions. Examples of such statements in this report include the Company's anticipated performance for the remainder of 2009 (including the Company's assumptions for such performance and expected levels of costs and expenses to be incurred in the remainder of 2009), anticipated same store revenues trends in 2010, anticipated losses on early extinguishment of indebtedness, expectations regarding the timing and delivery of completed for-sale condominium homes, anticipated sales of for-sale condominium homes, including expectations regarding demand for for-sale housing and the Company's inability to sell for-sale products at attractive pricing levels, anticipated construction and development activities (including projected costs, timing and anticipated potential sources of financing of future development activities), anticipated costs, timing and expense to remediate and improve apartment communities with stucco and EIFS exteriors, expectations regarding the retirement of certain assets, expectations regarding the timing and projected future cash flows from assets held for future investment and sale and estimated fair values of such assets, expectations regarding cash flows from operating activities, expected costs of development, investment and interest expenses, anticipated refinancing and other new financing needs, expectations regarding the use of proceeds from the Company's common stock offering, the anticipated dividend level in 2009 and expectations regarding the source of funds for payment of the dividend, the Company's ability to meet short-term liquidity requirements, including capital expenditures, development and construction expenditures, land and apartment community acquisitions, dividends and distributions on its common and preferred equity and debt service requirements and long-term liquidity requirements including maturities of long-term debt and acquisition and development activities, the Company's ability to execute future asset sales, expectations regarding the outcome of legal proceedings, anticipated taxable capital gains for 2009, and expectations regarding the Company's ability to maintain its REIT status under the Internal Revenue Code of 1986, as amended (the "Code"). 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 for the year ended December 31, 2008 (the "Form 10-K") and those discussed under "Conclusion of Strategic Process and Strategies to Enhance Shareholder Value" in the Management Discussion and Analysis of Financial Condition and Results of Operations of the Form 10-K;
• 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;
• A downgrade in the credit rating of the Company's securities;
• 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;
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited, in thousands, except per share or unit and apartment unit data)
• 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 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 costs of remediating damage to the Company's communities that have stucco or exterior insulation finishing systems for potential water penetration and other related issues;
• The Company's ability to continue to qualify as a REIT under the Code; and
• Other factors, including the risk factors discussed in Item 1A of the Form 10-K.
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 Guidance
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 for the year ended December 31, 2008. The Company's . . .
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