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Post Properties (PPS)Stock (REIT - Retail Industry, Real Estate Industry)
Headquartered in Atlanta, Georgia, Post Properties, Inc. (PPS) has developed and operated luxury multi-family apartment communities under the renowned Post brand, since its formation in 1971. As of September 30, 2007, the self-administered and self-managed REIT owned 22,478 apartment homes in 63 communities, including properties under development or held in unconsolidated entities. The company is also developing 367 for sale condominium homes and converting 349 additional units to for sale product. With excessive competition still hampering its core markets, Post Properties continues to diversify into higher barrier markets such as New York City and Greater Washington D.C., among others. In line with this strategy, it is disposing of properties in its core markets and undertaking fresh development in newer areas. In addition, Post Properties is focusing more on urban apartment properties rather than suburban, garden-style communities in its portfolio. The company's top markets are Atlanta (34.4% of total same store NOI), Dallas (16.8%), Washington D.C. (15.6%), and Tampa (11.2%). Post reported 3Q FFO of $0.53 per share, which includes $0.02 per share of additional income due to reduced compensation expense. Results came in $0.02 per share above our estimates. Operationally, Post had another solid quarter, with increases in most metrics. Same store revenue increased 4.7% in the 3rd quarter 2007 compared to 3Q 2006. Year over year rental rates increased 4.2%, while, YTD, rental rates have increased 5.6%. Average monthly rental rates increased to $1,253 per unit in the quarter, up from $1,202 per unit in 3Q 2006. Same store NOI increased 4.6% in the 3rd quarter vs. the prior year quarter, while operating expenses increased 4.8% over the same time frame. Property operating expenses continue to increase partly due to higher insurance and real estate taxes. Most of the company's markets reported solid increases in same store revenue and NOI. Same store NOI increased in New York (up 8.3% 3Q 2007 vs. 3Q 2006), Houston (20.7%), Dallas (11.0%), Washington D.C (3.5%), Charlotte (6.1%), Atlanta (1.4%), and Orlando (3.5%). Only Tampa reported a decrease in SS NOI (1.2%). Florida continues to be a soft market for apartments, as unsold condos are now being rented, which has added competition for multi family owners. While 3rd quarter results were generally good, we expect rental rate increases to moderate going into 2008. 3Q average rent per unit increased 1.2% from 2Q 2007 and SS NOI increased 2.0% from last quarter. Average economic occupancy increased by 60 bps points in the 3rd quarter compared to last year. YTD, average economic occupancy dropped by 50 bps from last year. Declining occupancy trends could be a a sign that the company will have to decrease the pace of rate increases or risk increasing turnover. Despite a recent sell off, Post still trades at an inflated multiple relative to short term growth prospects. The company is currently valued at 18.6x our 207 FFO estimates, a 25% premium to sector averages. Post shares are trading at an approximate 5.8% implied cap rate, which is low by historical standards. The company's current valuation is not sustainable as the shares are still priced in anticipation of a buyout. Additionally, if job growth slows, there is a real possibility of a continued correction in the entire apartment REIT sector, which has been red hot over the past couple of years. Considering the company's heavy reliance on low barrier markets such as Atlanta and Dallas, in addition to the slumping Tampa market, we do not believe the company warrants a premium valuation, and shares could very likely fall to be more in line with sector averages. Developers can quickly add new supply in these markets, which is a drag on long term rent growth and occupancy. Additionally, Post has been unable to cover its current dividend at an AFFO level (Adjusted Funds from Operations), or funds from operations after capital expenditures. In 2006 AFFO was $1.49 per share compared to a common dividend of $1.80 per share. Through the first three quarters of 2007, reported AFFO was $1.19 per share, vs. a $1.35 per share dividend payout. Certainly we do not forecast any dividend increases in the near future. The current yield, 4.9%, is slightly below sector averages. Running a deficit to free cash flow severely constrains the company's balance sheet and ability to make strategic acquisitions as the market improves. Currently, the average monthly rent Post charges tenants is about $1,253 per month. Despite the current portfolio repositioning, most of Post's income is still derived from areas where homes are inexpensive. Post currently has the most expensive apartments in its markets, and there is evidence that the company has reached the limit to where it can push rental rates. We think occupancy decreases will continue through the end of the year, as such, rental rates will be flat or could begin to fall. Additionally, if builders continue cutting prices in a deteriorating housing market, high end apartment rentals could be negatively affected. With still low interest rates, renters at many of the company's upscale communities could easily afford houses in Dallas and Atlanta. The company has guided to year over year SS NOI growth of approximately 2-3% in the 4th quarter. Expenses are expected to increase about 8%, mainly due to favorable tax accruals in 2006. We think this might be too optimistic and look for flat NOI growth in the 4th quarter and through 1Q 2008. We think apartment fundamentals might have peaked in late 2006, and would only buy the strongest apartment REITs with assets in the best markets.
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