|
|
 | | | |
- close
- close
- close
- close
Post Properties 10-K 2007 Documents found in this filing:
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, DC 20549
[X] ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2006
OR
[ ] TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 1-12080
Commission file number 0-28226
POST APARTMENT HOMES,
L.P.
(Exact name of registrants as
specified in their charters)
4401 Northside Parkway,
Suite 800, Atlanta, Georgia 30327
(Address of principal executive
office – zip code)
(404) 846-5000
(Registrant’s telephone
number, including area code)
Securities registered pursuant to
section 12(b) of the Act:
Securities registered pursuant to
Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
Indicate by check mark whether the Registrants (1) have
filed all reports required to be filed by section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and
(2) have been subject to such filing requirements for the
past 90 days.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. [ ]
The aggregate market value of the shares of common stock held by
non-affiliates (based upon the closing sale price on the New
York Stock Exchange) on June 30, 2006 was approximately
$1,906,489,600. As of February 15, 2007, there were
43,565,126 shares of common stock, $.01 par value,
outstanding.
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large accelerated
filer in
Rule 12b-2
of the Exchange Act.
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Portions of the Post Properties, Inc.’s Proxy Statement in
connection with its Annual Meeting of Shareholders to be held
May 24, 2007 are incorporated by reference in Part III.
FINANCIAL INFORMATION
Table of Contents
PART I
The
Company
Post Properties, Inc. and its subsidiaries develop, own and
manage upscale multifamily apartment 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
December 31, 2006, approximately 44.5%, 18.8%, 12.1% and
9.7% (on a unit basis) of the Company’s communities were
located in the Atlanta, Georgia, Dallas, Texas, the greater
Washington, D.C. and Tampa, Florida metropolitan areas,
respectively. At December 31, 2006, the Company owned
21,745 apartment units in 61 apartment communities, including
545 apartment units in two communities held in unconsolidated
entities and 1,181 apartment units in four communities (and the
expansion of one community) currently under construction
and/or in
lease-up.
The Company is also developing 230 for-sale condominium homes
and is converting apartment homes in four communities initially
consisting of 597 units (including 121 units in one
community held in an unconsolidated entity) into for-sale
condominium homes through a taxable REIT subsidiary. The Company
is a fully integrated organization with multifamily development,
operations and asset management expertise. The Company has
approximately 790 employees, 16 of whom are parties to a
collective bargaining agreement.
The Company is a self-administrated and self-managed equity real
estate investment trust (a “REIT”). 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.
The Company’s and the Operating Partnership’s
executive offices are located at 4401 Northside Parkway,
Suite 800, Atlanta, Georgia 30327 and their telephone
number is
(404) 846-5000.
Post Properties, Inc., a Georgia corporation, was incorporated
on January 25, 1984, and is the successor by merger to the
original Post Properties, Inc., a Georgia corporation, which was
formed in 1971. The Operating Partnership is a Georgia limited
partnership that was formed in July 1993 for the purpose of
consolidating the operating and development businesses of the
Company and the
Post®
apartment portfolio described herein.
The Operating Partnership, through the operating divisions and
subsidiaries described below, is the entity through which all of
the Company’s operations are conducted. At
December 31, 2006, the Company, through wholly-owned
subsidiaries, controlled the Operating Partnership as the sole
general partner and as the holder of 98.4% of the common units
in the Operating Partnership (the “Common Units”) and
100% of the preferred units (the “Perpetual Preferred
Units”). The other limited partners of the Operating
Partnership who hold Common Units are those persons who, at the
time of the Company’s initial public offering, elected to
hold all or a portion of their interests in the form of Common
Units rather than receiving shares of common stock. Holders of
Common Units may cause the Operating Partnership to redeem any
of their Common Units for, at the option of the Operating
Partnership, either one share of Common Stock or cash equal to
the fair market value thereof at the time of such redemption.
The Operating Partnership presently anticipates that it will
cause shares of common stock to be issued in connection with
each such redemption (as has been done in all redemptions to
date) rather than paying cash. With each redemption of
outstanding Common Units for common stock, the Company’s
percentage ownership interest in the Operating Partnership will
increase. In addition, whenever the Company issues shares of
common and preferred stock, the Company will contribute any net
proceeds to the Operating Partnership, and the Operating
Partnership will issue an equivalent number of Common Units or
Perpetual Preferred Units, as appropriate, to the Company.
As the sole shareholder of the Operating Partnership’s sole
general partner, the Company has the exclusive power under the
limited partnership agreement of the Operating Partnership to
manage and conduct the business of the Operating Partnership,
subject to the consent of a majority of the outstanding Common
Units in connection with the sale of all or substantially all of
the assets of the Operating Partnership or in connection with a
dissolution of the Operating Partnership. The board of directors
of the Company manages the affairs of the Operating Partnership
by directing the affairs of the Company. In general, the
Operating Partnership cannot be terminated, except in connection
with a sale of all or substantially all of the assets of the
Company, until January 2044 without the approval of each limited
partner who received Common Units of the Operating Partnership
in connection with the Company’s initial public offering.
The Company’s indirect limited and general partner
interests in the Operating Partnership entitle it to share in
cash
1
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
distributions from, and in the profits and losses of, the
Operating Partnership in proportion to the Company’s
percentage interest in the Operating Partnership and indirectly
entitle the Company to vote on all matters requiring a vote of
the Operating Partnership.
As part of the formation of the Operating Partnership, a holding
company, Post Services, Inc. (“Post Services”) was
organized as a separate corporate subsidiary of the Operating
Partnership. Through Post Services and its subsidiaries, the
Operating Partnership will develop and sell for-sale condominium
homes and provide other services to third parties. Post Services
is a “taxable REIT subsidiary” as defined in the
Internal Revenue Code. The Operating Partnership owns 100% of
the voting and nonvoting common stock of Post Services, Inc.
The Company’s mission is to deliver superior satisfaction
and value to its residents, associates and investors, with a
vision to be the first choice in quality multifamily living. Key
elements of the Company’s business strategy are as follows:
The Company’s investment, disposition and acquisition
strategy is aimed to achieve a real estate portfolio that has
uniformly high quality, low average age properties and cash flow
diversification. The Company plans to achieve its objectives by
reducing its asset concentration in Atlanta, Georgia, while at
the same time, building critical mass in other core markets
where it may currently lack the portfolio size to achieve
operating efficiencies and the full value of the
Post®
brand. The Company defines critical mass for this purpose as at
least 2,000 apartment units or $200 million of investment
in a particular market. The Company’s goal ultimately is to
reduce its concentration in Atlanta, Georgia, measured by
dollars invested, to not more than 30% of the portfolio.
The Company plans to achieve its objectives by selling older and
least competitively located properties, and it may also consider
selling joint venture interests in some of its core properties
or selectively converting some of these properties to for-sale
(condominium) housing depending on market conditions. The
Company expects that this strategy will provide capital to
reinvest in new communities in dynamic neighborhoods and may
also allow for leveraged returns through joint venture
structures that preserve
Post®
branded property and asset management.
The Company is focusing on a limited number of major cities and
has regional value creation capabilities. The Company has
investment and development personnel to pursue acquisitions,
development, rehabilitations and dispositions of apartment
communities and select multifamily for-sale (condominium)
opportunities that are consistent with its market strategy. The
Company’s value creation capabilities include the regional
value creation teams in Atlanta, Georgia (focusing on the
Southeast), Washington, DC (focusing on the mid-Atlantic market
and New York, New York) and Dallas, Texas (focusing on the
Southwest, currently limited to the Texas market). The Company
operates in nine markets as of December 31, 2006. The
Company expects to enter the Raleigh, North Carolina market in
2007.
Key elements of the Company’s investment and acquisition
strategy include instilling a disciplined team approach to
development and acquisition decisions and selecting sites and
properties in infill suburban and urban locations in strong
primary markets that serve the higher-end multifamily consumer.
The Company plans to develop, construct and continually maintain
and improve its apartment communities consistent with quality
standards management believes are synonymous with the
Post®
brand. New acquisitions will be limited to properties that meet,
or that are expected to be repositioned and improved to meet,
its quality and location requirements. The Company will
generally pursue acquisitions either to rebalance its property
portfolio, using the proceeds of asset sales to redeploy capital
in markets where critical mass is desired, or to pursue
opportunistic purchases on a selective basis where market
conditions warrant.
The
Post®
brand name has been cultivated for more than 35 years, and
its promotion has been integral to the Company’s success.
Company management believes that the
Post®
brand name is synonymous with quality upscale apartment
communities that are situated in desirable locations and that
provide a high level of resident service. The Company believes
that it provides its residents with a high level of service,
including attractive landscaping and numerous amenities,
including controlled access, high-speed connectivity,
on-site
business centers,
on-site
courtesy officers, urban vegetable gardens and fitness centers
at a number of its communities.
Key elements in implementing the Company’s brand name
strategy include extensively utilizing the trademarked brand
name and coordinating its advertising programs to increase brand
name recognition. During recent years, the Company implemented
new marketing campaigns, started new customer service programs
designed to maintain high levels of resident satisfaction and
have provided employees and residents new opportunities for
community involvement, all intended to enhance what it believes
is a valuable asset.
2
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
In early 2005, the Company launched a new for-sale housing
brand, Post Preferred
Homestm,
which serves as the unified marketing umbrella for the
Company’s for-sale ventures, including developing new
communities and converting existing assets into upscale for-sale
condominium housing in several key markets. The Company’s
for-sale ventures are marketed under the Post Preferred
Homestm
brand to differentiate for-sale product from the Company’s
rental portfolio while capitalizing on the Company’s unique
brand heritage.
The Company’s service orientation strategy includes
utilizing independent third parties to regularly measure
resident satisfaction and providing performance incentives to
its associates linked to delivering a high level of service and
enhancing resident satisfaction. The Company also achieves its
objective by investing in the development and implementation of
training programs focused on associate development, improving
the quality of its operations and the delivery of resident
service.
The Company’s operating strategy includes striving to be an
innovator and a leader in anticipating customer needs while
achieving operating consistency across its properties. The
Company also will continue to explore opportunities to improve
processes and technology that drive efficiency in its business.
Since 2005, the Company implemented new property operating,
centralized procurement and revenue pricing software for this
purpose.
The Company’s financing strategy is to maintain a strong
balance sheet and to maintain its investment grade credit
rating. The Company plans to achieve its objectives by generally
maintaining total effective leverage (debt and preferred equity)
as a percentage of undepreciated real estate assets to not more
than 55%, by generally limiting variable rate indebtedness as a
percentage of total indebtedness to not more than 25% of
aggregate indebtedness, and by maintaining adequate liquidity
through its unsecured lines of credit. At December 31,
2006, the Company’s total effective leverage (debt and
preferred equity) as a percentage of undepreciated real estate
assets and its total variable rate indebtedness as a percentage
of total indebtedness were below these percentages.
The major operating divisions of the Company include Post
Apartment Management, Post Investment Group and Post Corporate
Services. Each of these operating divisions is discussed below.
Post Apartment Management is responsible for the
day-to-day
operations of all
Post®
communities including community leasing, property management,
personnel recruiting, training and development, maintenance and
security. Post Apartment Management also conducts short-term
corporate apartment leasing activities and is the largest
division in the Company (based on the number of employees).
Post Investment Group is responsible for all development,
acquisition, rehabilitation, disposition, for-sale (condominium)
and asset management activities of the Company. For development,
this includes site selection, zoning and regulatory approvals,
project design and construction management. This division is
also responsible for apartment community acquisitions as well as
property dispositions and strategic joint ventures that the
Company undertakes as part of its investment strategy. The
division recommends and executes major value added renovations
and redevelopments of existing communities as well as direction
for investment levels within each city and any new geographic
market areas and new product types that the Company may consider.
Post Corporate Services provides executive direction and control
to the Company’s other divisions and subsidiaries and has
responsibility for the creation and implementation of all
Company financing, capital and risk management strategies. All
accounting, management reporting, compliance, information
systems, human resources, legal, risk management and insurance
services required by the Company and all of its affiliates are
centralized in Post Corporate Services.
The Post Apartment Management division of the Company manages
the owned apartment communities based on the operating segments
associated with the various stages in the apartment ownership
lifecycle. The Company’s primary
3
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
operating segments are described below. In addition to these
segments, all commercial properties and other ancillary service
and support operations are reviewed and managed separately and
in the aggregate by Company management.
A summary of segment operating results for 2006, 2005 and 2004
is included in note 15 to the Company’s consolidated
financial statements. Additionally, segment operating
performance for such years is discussed in Item 7,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in this annual report
on
Form 10-K.
During the five-year period from January 1, 2002 through
December 31, 2006, the Company and its affiliates have
developed and completed 2,608 apartment units in 10 apartment
communities including the expansion of three communities, and
sold 30 apartment communities containing an aggregate of 13,174
apartment units. During the same period, the Company acquired 5
apartment communities containing 1,487 units. The Company
and its affiliates have sold apartment communities after holding
them for investment periods that generally range up to twenty
years after acquisition or development. The following table
shows a summary of the Company’s development and sales
activity during these periods.
4
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
At December 31, 2006, the Company had three communities and
one community expansion under development and
lease-up,
containing 1,031 apartment units, and 230 for-sale condominium
homes under development in two communities. These communities
are summarized in the table below.
All of the Company’s apartment and for-sale (condominium)
communities are located in developed markets that include other
upscale apartments and for-sale (condominium) projects owned by
numerous public and private companies. Some of these companies
may have substantially greater resources and greater access to
capital than the Company, allowing them to grow at rates greater
than the Company. The number of competitive upscale apartment
and for-sale (condominium) properties and companies in a
particular market could have a material effect on the
Company’s ability to lease apartment units at its apartment
communities, including any newly developed or acquired
communities, and on the rents charged, and could have a material
effect on the Company’s ability to sell for-sale
(condominium) units and on the selling prices of such units. In
addition, other forms of residential properties, including
single family housing and town homes, provide housing
alternatives to potential residents of upscale apartment
communities or potential purchasers of for-sale (condominium)
units.
The Company competes for residents in its apartment communities
based on its high level of resident service, the quality of its
apartment communities (including its landscaping and amenity
offerings) and the desirability of its locations. Resident
leases at its apartment communities are priced competitively
based on market conditions, supply and demand characteristics,
and the quality and resident service offerings of its
communities. The Company does not seek to compete on the basis
of providing the low-cost solution for all residents.
The Company’s multi-family housing communities and any
newly acquired multi-family housing communities must comply with
Title III of the Americans with Disabilities Act (the
“ADA”) to the extent that such properties are
“public accommodations”
and/or
“commercial facilities” as defined by the ADA.
Compliance with the ADA requirements could require removal of
structural barriers to handicapped access in certain public
areas of the Company’s multi-family housing communities
where such removal is readily achievable. The ADA does not,
however, consider residential properties, such as multi-family
housing communities, to be public accommodations or commercial
facilities, except to the extent portions of such facilities,
such as the leasing office, are open to the public. The Company
must also comply
5
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
with the Fair Housing Amendment Act of 1988, or the FHAA, which
requires that apartment communities first occupied after
March 13, 1991 be accessible to persons with disabilities.
Noncompliance with the FHAA and ADA could result in the
imposition of fines, awards of damages to private litigants,
payment of attorneys’ fees and other costs to plaintiffs,
substantial litigation costs and substantial costs of
remediation. Compliance with the FHAA could require removal of
structural barriers to handicapped access in a community,
including the interiors of multi-family housing units covered
under the FHAA. In addition to the ADA and FHAA, state and local
laws exist that impact the Company’s multi-family housing
communities with respect to access thereto by persons with
disabilities. Further, legislation or regulations adopted in the
future may impose additional burdens or restrictions on the
Company with respect to improved access by persons with
disabilities. The ADA, FHAA, or other existing or new
legislation may require the Company to modify its existing
properties. These laws may also restrict renovations by
requiring improved access to such buildings or may require the
Company to add other structural features that increase its
construction costs.
Recently there has been heightened scrutiny of multifamily
housing communities for compliance with the requirements of the
FHAA and ADA. In November 2006, the Equal Rights Center, or ERC,
filed a lawsuit against the Company and the Operating
Partnership alleging various violations of the FHAA and the ADA
at certain properties designed, constructed or operated by the
Company and the Operating Partnership. The ERC seeks
compensatory and punitive damages in unspecified amounts, an
award of attorneys’ fees and costs of suit, as well as
preliminary and permanent injunctive relief that includes
retrofitting multi-family housing units and public use areas to
comply with the FHAA and ADA and prohibiting construction or
sale of noncompliant units or complexes.
Due to the preliminary nature of the litigation, it is not
possible to predict or determine the outcome of the legal
proceeding, nor is it possible to estimate the amount of loss,
if any, that would be associated with an adverse decision. The
Company cannot ascertain the ultimate cost of compliance with
the ADA, FHAA or other similar state and local legislation and
such costs are not likely covered by insurance policies. The
cost associated with ongoing litigation or compliance could be
substantial and could adversely effect the Company’s
business, results of operations and financial condition.
The Company is subject to federal, state and local environmental
laws, ordinances, and regulations that apply to the development
of real property, including construction activities, the
ownership of real property, and the operation of multifamily
apartment and for-sale (condominium) communities.
The Company has instituted a policy that requires an
environmental investigation of each property that it considers
for purchase or that it owns and plans to develop. The
environmental investigation is conducted by a qualified
third-party environmental consultant in accordance with
recognized industry standards. The environmental investigation
report is reviewed by the Company and counsel prior to purchase
and/or
development of any property. If the environmental investigation
identifies evidence of potentially significant environmental
contamination that merits additional investigation, sampling of
the property is performed by the environmental consultant.
If necessary, remediation or mitigation of contamination,
including removal of contaminated soil
and/or
underground storage tanks, placement of impervious barriers, or
creation of land use or deed restrictions, is undertaken either
prior to development or at another appropriate time. When
performing remediation activities, the Company is subject to a
variety of environmental requirements. In some cases, the
Company obtains state approval of the selected remediation and
mitigation measures by entering into voluntary environmental
cleanup programs administered by state agencies.
In developing properties and constructing apartment and for-sale
(condominium) communities, the Company utilizes independent
environmental consultants to determine whether there are any
flood plains, wetlands or other environmentally sensitive areas
that are part of the property to be developed. If flood plains
are identified, development and construction work is planned so
that flood plain areas are preserved or alternative flood plain
capacity is created in conformance with federal and local flood
plain management requirements. If wetlands or other
environmentally sensitive areas are identified, the Company
plans and conducts its development and construction activities
and obtains the necessary permits and authorizations in
compliance with applicable legal standards. In some cases,
however, the presence of wetlands
and/or other
environmentally sensitive areas could preclude, severely limit,
or otherwise alter the proposed site development and
construction activities.
Storm water discharge from a construction site is subject to the
storm water permit requirements mandated under the Clean Water
Act. In most jurisdictions, the state administers the permit
programs. The Company currently anticipates that it will be able
to obtain and materially comply with any storm water permits
required for new development. The Company
6
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
has obtained and is in material compliance with the construction
site storm water permits required for its existing development
activities.
The Comprehensive Environmental Response, Compensation, and
Liability Act, 42 U.S.C. sec. 9601 et seq.
(“CERCLA”), and comparable state laws subject the
owner or operator of real property or a facility and persons who
arranged for off-site disposal activities to claims or liability
for the costs of removal or remediation of hazardous substances
that are released at, in, on, under, or from real property or a
facility. In addition to claims for cleanup costs, the presence
of hazardous substances on or the release of hazardous
substances from a property or a facility could result in a claim
by a private party for personal injury or property damage or
could result in a claim from a governmental agency for other
damages, including natural resource damages. Liability under
CERCLA and comparable state laws can be imposed on the owner or
the operator of real property or a facility without regard to
fault or even knowledge of the release of hazardous substances
and other regulated materials on, at, in, under, or from the
property or facility. Environmental liabilities associated with
hazardous substances also could be imposed on the Company under
other applicable environmental laws, such as the Resource
Conservation and Recovery Act (and comparable state laws), or
common-law principles. The presence of hazardous substances in
amounts requiring response action or the failure to undertake
necessary remediation may adversely affect the owner’s
ability to use or sell real estate or borrow money using such
real estate as collateral.
Various environmental laws govern certain aspects of the
Company’s ongoing operation of its communities. Such
environmental laws include those regulating the existence of
asbestos-containing materials in buildings, management of
surfaces with lead-based paint (and notices to residents about
the lead-based paint), use of active underground petroleum
storage tanks, and waste-management activities. The failure to
comply with such requirements could subject the Company to a
government enforcement action
and/or
claims for damages by a private party.
The Company has not been notified by any governmental authority
of any material noncompliance, claim, or liability in connection
with environmental conditions associated with any of its
apartment and for-sale (condominium) communities. The Company
has not been notified of a material claim for personal injury or
property damage by a private party relating to any of its
apartment and for-sale (condominium) communities in connection
with environmental conditions. The Company is not aware of any
environmental condition with respect to any of its apartment and
for-sale (condominium) communities that could be considered to
be material.
It is possible, however, that the environmental investigations
of the Company’s properties might not have revealed all
potential environmental liabilities associated with the
Company’s real property and its apartment and for-sale
(condominium) communities or the Company might have
underestimated any potential environmental issues identified in
the investigations. It is also possible that future
environmental laws, ordinances, or regulations or new
interpretations of existing environmental laws, ordinances, or
regulations will impose material environmental liabilities on
the Company; the current environmental conditions of properties
that the Company owns or operates will be affected adversely by
hazardous substances associated with other nearby properties or
the actions of third parties unrelated to the Company; or our
residents
and/or
commercial tenants may engage in activities prohibited by their
leases or otherwise expose the Company to liability under
applicable environmental laws, ordinances, or regulations. The
costs of defending any future environmental claims, performing
any future environmental remediation, satisfying any such
environmental liabilities, or responding to any changed
environmental conditions could materially adversely affect the
Company’s financial conditions and results of operations.
The Company makes its annual report on Form
10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to such reports filed pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, available (free of charge) on or through its
Internet website, located at http://www.postproperties.com, as
soon as reasonably practicable after they are filed with or
furnished to the SEC.
The following risk factors apply to Post Properties, Inc. (the
“Company”) and Post Apartment Homes, L.P. (the
“Operating Partnership”). All indebtedness described
in the risk factors has been incurred by the Operating
Partnership.
Market and economic conditions in the various metropolitan areas
of the United States where the Company operates, particularly
Atlanta, Georgia, Dallas, Texas, Tampa, Florida and the greater
Washington, D.C. area where a substantial
7
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
majority of the Company’s apartment communities are
located, may significantly affect occupancy levels and rental
rates and therefore profitability. Factors that may adversely
affect these conditions include the following:
Any of these factors could adversely affect the Company’s
ability to achieve desired operating results from its
communities.
The Company intends to continue to develop and construct
apartment communities and may convert existing apartment
communities into condominiums or develop for-sale (condominium)
housing. Development activities may be conducted through
wholly-owned affiliated companies or through joint ventures with
unaffiliated parties. The Company’s development and
construction activities may be exposed to the following risks:
Purchasers may not be willing to pay acceptable prices for
apartment communities that the Company wishes to sell. A weak
market may limit the Company’s ability to change its
portfolio promptly in response to changing economic conditions.
Also, if the Company is unable to sell apartment communities or
if it can only sell apartment communities at prices lower than
are generally acceptable, then the Company may have to take on
additional leverage in order to provide adequate capital to
execute its development and construction and acquisitions
strategy. Furthermore, a portion of the proceeds from the
Company’s overall property sales in the future may be held
in escrow accounts in order for some sales to qualify as like-
kind exchanges under Section 1031 of the Internal Revenue
Code so that any related capital gain can be deferred for
federal income tax purposes. As a result, the Company may not
have immediate access to all of the cash flow generated from
property sales.
8
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
At December 31, 2006, approximately 44.5%, 18.8%, 12.1% and
9.7% (on a unit basis) of the Company’s communities were
located in the Atlanta, Georgia, Dallas, Texas, greater
Washington, D.C. and Tampa, Florida metropolitan areas,
respectively. The Company is therefore subject to increased
exposure to economic and other competitive factors specific to
its markets within these geographic areas.
The Company is subject to the risks normally associated with
debt financing, including the risk that its cash flow will be
insufficient to make required payments of principal and
interest. Although the Company may be able to use cash flow
generated by its apartment communities or through the sale of
for-sale (condominium) housing to make future principal
payments, it may not have sufficient cash flow to be available
to make all required principal payments and still meet the
distribution requirements that the Company must satisfy in order
to maintain its status as a real estate investment trust or
“REIT” for federal income tax purposes. The following
factors, among others, may affect the cash flows generated by
the Company’s apartment communities and through the sale of
for-sale (condominium) housing:
Expenses associated with the Company’s investment in
apartment communities, such as debt service, real estate taxes,
insurance and maintenance costs, are generally not reduced when
circumstances cause a reduction in cash flows from operations
from that community. If a community is mortgaged to secure
payment of debt and the Company is unable to make the mortgage
payments, the Company could sustain a loss as a result of
foreclosure on the community or the exercise of other remedies
by the mortgagee. The Company is likely to need to refinance at
least a portion of its outstanding debt as it matures. There is
a risk that the Company may not be able to refinance existing
debt or that the terms of any refinancing will not be as
favorable as the terms of the existing debt. As of
December 31, 2006, the Company had outstanding mortgage
indebtedness of $364,866 (of which approximately $84,000 matures
in 2007), senior unsecured debt of $560,000 (of which $25,000
matures in 2007) and unsecured line of credit borrowings of
$108,913.
The Company’s stated goal is to generally maintain total
effective leverage (debt and preferred equity) as a percentage
of undepreciated real estate assets to not more than 55%, to
generally limit variable rate indebtedness as a percentage of
total indebtedness to not more than 25% of aggregate
indebtedness, and to maintain adequate liquidity through the
Company’s unsecured lines of credit.
At December 31, 2006, the Company’s total effective
leverage (debt and preferred equity) as a percentage of
undepreciated real estate assets and the Company’s total
variable rate indebtedness as a percentage of total indebtedness
were below these percentages. If management adjusts the
Company’s stated goal in the future, the Company could
become more highly leveraged, resulting in an increase in debt
service that could adversely affect funds from operations, the
Company’s ability to make expected distributions to its
shareholders and the Operating Partnership’s ability to
make expected distributions to its limited partners and in an
increased risk of default on the obligations of the Company and
the Operating Partnership. In addition, the Company’s and
the Operating Partnership’s ability to incur debt is
limited by covenants in bank and other credit agreements and in
the Company’s outstanding senior unsecured notes. The
Company manages its debt to be in compliance with its stated
policy and with these debt covenants, but subject to compliance
with these covenants, the Company may increase the amount of
outstanding debt at any time without a concurrent improvement in
the Company’s ability to service the additional debt.
Accordingly, the Company could become more
9
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
leveraged, resulting in an increased risk of default on its
obligations and in an increase in debt service requirements,
both of which could adversely affect the Company’s
financial condition and ability to access debt and equity
capital markets in the future.
The Company’s ability to execute its business strategy
depends on its access to an appropriate blend of debt financing,
including unsecured lines of credit and other forms of secured
and unsecured debt, and equity financing, including common and
preferred equity. Debt financing may not be available in
sufficient amounts, or on favorable terms or at all. If the
Company issues additional equity securities to finance
developments and acquisitions instead of incurring debt, the
interests of existing shareholders could be diluted.
The Company’s ability to successfully complete a
condominium conversion or other for-sale housing project, sell
the units and achieve management’s economic goals in
connection with the transaction is subject to various risks and
challenges, which if they materialize, may have an adverse
effect on the Company’s business, results of operations and
financial condition including:
In general, profits realized to date from the Company’s
sale of condominium homes have been more volatile than the
Company’s core apartment rental operations. In addition,
the Company believes that the demand of prospective buyers, the
supply and competition from other condominiums and other types
of residential housing, and the level of mortgage interest rates
and the affordability of housing, among other factors, could
have a significant impact on its ability to sell for-sale units
and on the sales prices achieved. If the Company is unable to
sell for-sale condominium homes, the Company could decide to
rent unsold units or could cause a condominium community to
revert to a rental apartment community. If these risks were to
materialize, it could cause the Company to realize impairment
losses in future periods and it could cause economic returns
that are materially lower than anticipated. In addition, if the
Company is unable to sell for-sale units, the expenses and
carrying costs associated with the ownership of such units would
continue.
The Company may selectively acquire apartment communities that
meet its investment criteria. The Company’s acquisition
activities and their success may be exposed to the following
risks:
10
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
The Company’s apartment communities compete with numerous
housing alternatives in attracting residents, including other
apartment communities and single-family rental homes, as well as
owner occupied single- and multi-family homes. Competitive
housing in a particular area and the increasing affordability of
owner occupied single and multi-family homes caused by declining
housing prices, mortgage interest rates and government programs
to promote home ownership could adversely affect the
Company’s ability to retain its residents, lease apartment
homes and increase or maintain rents.
The Company expects that other real estate investors will
compete to acquire existing properties and to develop new
properties. These competitors include insurance companies,
pension and investment funds, developer partnerships, investment
companies and other apartment REITs. This competition could
increase prices for properties of the type that the Company
would likely pursue, and competitors may have greater resources
than the Company. As a result, the Company may not be able to
make attractive investments on favorable terms, which could
adversely affect its growth.
For the full year of 2007, management of the Company currently
expects to maintain its current quarterly dividend payment rate
to common shareholders of $0.45 per share. At this dividend
rate, the Company currently expects that net cash flows from
operations reduced by annual operating capital expenditures for
2007 will not be sufficient to fund the dividend payments to
common and preferred shareholders by approximately $10,000 to
$15,000. The Company intends to use primarily the proceeds from
2007 asset (including condominium) sales to fund the additional
cash flow necessary to fully fund the dividend payments to
common shareholders. In prior periods, the additional funding,
in excess of cash flows from operating activities less operating
capital expenditures, required to pay the quarterly dividends
was funded through a combination of line of credit borrowings
and proceeds from asset sales. The Company’s board of
directors reviews the dividend quarterly, and there can be no
assurance that the current dividend level will be maintained.
The Company has incurred, and expects to continue to incur, debt
bearing interest at rates that vary with market interest rates.
Therefore, if interest rates increase, the Company’s
interest costs will rise to the extent its variable rate debt is
not hedged effectively. Further, while the Company’s stated
goal is to limit variable rate debt to not more than 25% of
total indebtedness, management may adjust these levels over
time. In addition, an increase in market interest rates may lead
purchasers of the Company’s securities to demand a higher
annual yield, which could adversely affect the market price of
the Company’s common and preferred stock and debt
securities.
From time to time when the Company anticipates issuing debt
securities, it may seek to limit exposure to fluctuations in
interest rates during the period prior to the pricing of the
securities by entering into interest rate hedging contracts. The
Company may do this to increase the predictability of its
financing costs. Also, from time to time, the Company may rely
on interest rate hedging contracts to limit its exposure under
variable rate debt to unfavorable changes in market interest
rates. If the pricing of new debt securities is not within the
parameters of, or market interest rates produce a lower interest
cost than the Company incurs under, a particular interest rate
hedging contract, the contract may be ineffective. Furthermore,
the settlement of interest rate hedging contracts has at times
involved and may in the future involve material charges. These
charges are typically related to the extent and timing of
fluctuations in interest rates. Despite the Company’s
efforts to minimize its exposure to interest rate fluctuations,
the Company cannot guarantee that it will maintain coverage for
all of its outstanding indebtedness at any particular time. If
the Company does not effectively protect itself from this risk,
it may be subject to increased interest costs resulting from
interest rate fluctuations.
The Company may from time to time commence development activity
or make acquisitions outside of its existing market areas if
appropriate opportunities arise. The Company’s historical
experience in its existing markets does not ensure that it
11
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
will be able to operate successfully in new markets. The Company
may be exposed to a variety of risks if it chooses to enter new
markets. These risks include, among others:
The Company’s multi-family housing communities and any
newly acquired multi-family housing communities must comply with
Title III of the Americans with Disabilities Act, or the
ADA, to the extent that such properties are “public
accommodations”
and/or
“commercial facilities” as defined by the ADA.
Compliance with the ADA requirements could require removal of
structural barriers to handicapped access in certain public
areas of the Company’s multi-family housing communities
where such removal is readily achievable. The ADA does not,
however, consider residential properties, such as multi-family
housing communities to be public accommodations or commercial
facilities, except to the extent portions of such facilities,
such as the leasing office, are open to the public.
The Company must also comply with the Fair Housing Amendment Act
of 1988, or the FHAA, which requires that multi-family housing
communities first occupied after March 13, 1991 be
accessible to persons of disabilities. Noncompliance with the
FHAA and ADA could result in the imposition of fines, awards of
damages to private litigants, payment of attorneys’ fees
and other costs to plaintiffs, substantial litigation costs and
substantial costs of remediation. Compliance with the FHAA could
require removal of structural barriers to handicapped access in
a community, including the interiors of apartment units covered
under the FHAA. In addition to the ADA and FHAA, state and local
laws exist that impact the Company’s multi-family housing
communities with respect to access thereto by persons with
disabilities. Further, legislation or regulations adopted in the
future may impose additional burdens or restrictions on the
company with respect to improved access by persons with
disabilities. The ADA, FHAA, or other existing or new
legislation may require the Company to modify its existing
properties. These laws may also restrict renovations by
requiring improved access to such buildings or may require the
Company to add other structural features that increase its
construction costs.
Recently there has been heightened scrutiny of multifamily
housing communities for compliance with the requirements of the
FHAA and ADA. In November 2006, the Equal Rights Center, or ERC,
filed a lawsuit against the Company and the Operating
Partnership alleging various violations of the FHAA and the ADA
at certain properties designed, constructed or operated by the
Company and the Operating Partnership. The ERC seeks
compensatory and punitive damages in unspecified amounts, an
award of attorneys’ fees and costs of suit, as well as
preliminary and permanent injunctive relief that includes
retrofitting multi-family housing units and public use areas to
comply with the FHAA and ADA and prohibiting construction or
sale of noncompliant units or complexes.
Due to the preliminary nature of the litigation, it is not
possible to predict or determine the outcome of the legal
proceeding, nor is it possible to estimate the amount of loss,
if any, that would be associated with an adverse decision. The
Company cannot ascertain the ultimate cost of compliance with
the ADA, FHAA or other similar state and local legislation and
such costs are not likely covered by insurance policies. The
cost associated with ongoing litigation or compliance could be
substantial and could adversely affect the Company’s
business, results of operations and financial condition.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that
companies evaluate and report on their systems of internal
control over financial reporting. In addition, the
Company’s independent registered public accounting firm
must report on management’s evaluation of those controls.
In future periods, the Company may identify deficiencies in its
system of internal controls over financial reporting that may
require remediation. There can be no assurances that any such
future deficiencies identified may not be material weaknesses
that would be required to be reported in future periods.
12
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
The Company carries comprehensive liability, fire, flood,
extended coverage and rental loss insurance on its properties,
which are believed to be of the type and amount customarily
obtained on real property assets. The Company intends to obtain
similar coverage for properties acquired or developed in the
future. However, some losses, generally of a catastrophic
nature, such as losses from floods or wind storms, may be
subject to limitations. The Company exercises discretion in
determining amounts, coverage limits and deductibility
provisions of insurance, with a view to maintaining appropriate
insurance on its investments at a reasonable cost and on
suitable terms; however, the Company may not be able to maintain
its insurance at a reasonable cost or in sufficient amounts to
protect it against potential losses. Further, the Company’s
insurance costs could increase in future periods. If the Company
suffers a substantial loss, its insurance coverage may not be
sufficient to pay the full current market value or current
replacement value of the lost investment. Inflation, changes in
building codes and ordinances, environmental considerations and
other factors also might make it infeasible to use insurance
proceeds to replace a property after it has been damaged or
destroyed.
The Company is in the business of owning, operating, developing,
acquiring and, from time to time, selling real estate. Under
various federal, state and local environmental laws, as a
current or former owner or operator, the Company could be
required to investigate and remediate the effects of
contamination of currently or formerly owned real estate by
hazardous or toxic substances, often regardless of its knowledge
of or responsibility for the contamination and solely by virtue
of its current or former ownership or operation of the real
estate. In addition, the Company could be held liable to a
governmental authority or to third parties for property and
other damages and for investigation and
clean-up
costs incurred in connection with the contamination. These costs
could be substantial, and in many cases environmental laws
create liens in favor of governmental authorities to secure
their payment. The presence of such substances or a failure to
properly remediate any resulting contamination could materially
and adversely affect the Company’s ability to borrow
against, sell or rent an affected property.
As a general matter, concern about indoor exposure to mold has
been increasing as such exposure has been alleged to have a
variety of adverse effects on health. As a result, there has
been a number of lawsuits in the Company’s industry against
owners and managers of apartment communities relating to
moisture infiltration and resulting mold. The Company has
implemented guidelines and procedures to address moisture
infiltration and resulting mold issues if and when they arise.
The Company believes that these measures will minimize the
potential for any adverse effect on its residents. The terms of
its property and general liability policies generally exclude
certain mold-related claims. Should an uninsured loss arise
against the Company, the Company would be required to use its
funds to resolve the issue, including litigation costs. The
Company makes no assurance that liabilities resulting from
moisture infiltration and the presence of or exposure to mold
will not have a future impact on its business, results of
operations and financial condition.
Instead of purchasing certain apartment communities directly,
the Company has invested and may continue to invest as a
co-venturer. Joint venturers often have shared control over the
operations of the joint venture assets. Therefore, it is
possible that the co-venturer in an investment might become
bankrupt, or have economic or business interests or goals that
are inconsistent with the Company’s business interests or
goals, or be in a position to take action contrary to the
Company’s instructions, requests, policies or objectives.
Consequently, a co-venturer’s actions might subject
property owned by the joint venture to additional risk. Although
the Company seeks to maintain sufficient influence of any joint
venture to achieve its objectives, the Company may be unable to
take action without the Company’s joint venture
partners’ approval, or joint venture partners could take
actions binding on the joint venture without the Company’s
consent. Additionally, should a joint venture partner become
bankrupt, the Company could become liable for such
partner’s share of joint venture liabilities.
When the Company’s residents decide not to renew their
leases upon expiration, the Company may not be able to relet
their units. Even if the residents do renew or the Company can
relet the units, the terms of renewal or reletting may be less
favorable than current leases terms. Because virtually all of
the Company’s leases are for apartments, they are generally
for no more than one year. If the Company is unable to promptly
renew the leases or relet the units, or if the rental rates upon
renewal or reletting are significantly lower than expected
rates, then the Company’s results of operations and
13
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
financial condition will be adversely affected. Consequently,
the Company’s cash flow and ability to service debt and
make distributions to security holders would be reduced.
The Company’s qualification as a REIT for federal income
tax purposes depends upon its ability to meet on a continuing
basis, through actual annual operating results, distribution
levels and diversity of stock ownership, the various
qualification tests and organizational requirements imposed upon
REITs under the Internal Revenue Code. The Company believes that
it has qualified for taxation as a REIT for federal income tax
purposes commencing with its taxable year ended
December 31, 1993, and plans to continue to meet the
requirements to qualify as a REIT in the future. Many of these
requirements, however, are highly technical and complex.
Therefore, the Company may not have qualified or may not
continue to qualify in the future as a REIT. The determination
that the Company qualifies as a REIT for federal income tax
purposes requires an analysis of various factual matters that
may not be totally within the Company’s control. Even a
technical or inadvertent mistake could jeopardize the
Company’s REIT status. Furthermore, Congress and the IRS
might make changes to the tax laws and regulations, and the
courts might issue new decisions that make it more difficult, or
impossible, for the Company to remain qualified as a REIT. The
Company does not believe, however, that any pending or proposed
tax law changes would jeopardize its REIT status.
If the Company were to fail to qualify for taxation as a REIT in
any taxable year, and certain relief provisions of the Internal
Revenue Code did not apply, the Company would be subject to tax
(including any applicable alternative minimum tax) on its
taxable income at regular corporate rates, leaving less money
available for distributions to its shareholders. In addition,
distributions to shareholders in any year in which the Company
failed to qualify would not be deductible by the Company for
federal income tax purposes nor would they be required to be
made. Unless entitled to relief under specific statutory
provisions, the Company also would be disqualified from taxation
as a REIT for the four taxable years following the year during
which it ceased to qualify as a REIT. It is not possible to
predict whether in all circumstances the Company would be
entitled to such statutory relief. The Company’s failure to
qualify as a REIT likely would have a significant adverse effect
on the value of its securities.
Management believes that the Operating Partnership qualifies,
and has so qualified since its formation, as a partnership for
federal income tax purposes and not as a publicly traded
partnership taxable as a corporation. No assurance can be
provided, however, that the IRS will not challenge the treatment
of the Operating Partnership as a partnership for federal income
tax purposes or that a court would not sustain such a challenge.
If the IRS were successful in treating the Operating Partnership
as a corporation for federal income tax purposes, then the
taxable income of the Operating Partnership would be taxable at
regular corporate income tax rates. In addition, the treatment
of the Operating Partnership as a corporation would cause the
Company to fail to qualify as a REIT. See “The Company may
fail to qualify as a REIT for federal income tax purposes”
above.
The Company continually evaluates the recoverability of the
carrying value of its real estate assets for impairment
indicators. Factors considered in evaluating impairment of the
Company’s existing real estate assets held for investment
include significant declines in property operating profits,
recurring property operating losses and other significant
adverse changes in general market conditions that are considered
permanent in nature. Generally, a real estate asset held for
investment is not considered impaired if the undiscounted,
estimated future cash flows of the asset over its estimated
holding period are in excess of the asset’s net book value
at the balance sheet date. Assumptions used to estimate annual
and residual cash flow and the estimated holding period of such
assets require the judgment of management.
In 2004 and in prior years, the Company recorded impairment
charges on assets held for investment and assets designated as
held for sale. There can be no assurance that the Company will
not take additional charges in the future related to the
impairment of its assets. For the years ended December 31,
2006, 2005 and 2004, management believes it has applied
reasonable estimates and judgments in determining the proper
classification of its real estate assets. However, should
external or internal circumstances change requiring the need to
shorten the holding periods or adjust the estimated future cash
flows of certain of the Company’s assets, the Company could
be required to record additional impairment charges. If any real
estate asset held for investment is considered impaired, a loss
is provided to reduce the carrying value of the asset to its
fair value, less selling costs. Any future impairment could have
a material adverse affect on the Company’s results of
operations and funds from operations in the period in which the
charge is taken.
14
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
The articles of incorporation and bylaws of the Company and the
partnership agreement of the Operating Partnership contain a
number of provisions that could delay, defer or prevent a
transaction or a change in control that might involve a premium
price for the Company’s shareholders or otherwise be in
their best interests, including the following:
Preferred shares. The Company’s articles
of incorporation provide that the Company has the authority to
issue up to 20,000,000 shares of preferred stock, of which
2,900,000 were outstanding as of December 31, 2006. The
board of directors has the authority, without the approval of
the shareholders, to issue additional shares of preferred stock
and to establish the preferences and rights of such shares. The
issuance of preferred stock could have the effect of delaying or
preventing a change of control of the Company, even if a change
of control were in the shareholders’ interest.
Consent Rights of the Unitholders. Under the
partnership agreement of the Operating Partnership, the Company
may not merge or consolidate with another entity unless the
merger includes the merger of the Operating Partnership, which
requires the approval of the holders of a majority of the
outstanding units of the Operating Partnership. If the Company
were to ever hold less than a majority of the units, this voting
requirement might limit the possibility for an acquisition or a
change of control.
Ownership Limit. One of the requirements for
maintenance of the Company’s qualification as a REIT for
federal income tax purposes is that no more than 50% in value of
its outstanding capital stock may be owned by five or fewer
individuals, including entities specified in the Internal
Revenue Code, during the last half of any taxable year. To
facilitate maintenance of its qualification as a REIT for
federal income tax purposes, the ownership limit under the
Company’s articles of incorporation prohibits ownership,
directly or by virtue of the attribution provisions of the
Internal Revenue Code, by any person or persons acting as a
group of more than 6.0% of the issued and outstanding shares of
the Company’s common stock, subject to certain exceptions,
including an exception for shares of common stock held by
Mr. John A. Williams and Mr. John T. Glover, the
Company’s former chairman and former vice chairman and
certain investors for which the Company has waived the ownership
limit. Together, these limitations are referred to as the
“ownership limit.” Further, the Company’s
articles of incorporation include provisions allowing it to stop
transfers of and redeem its shares that are intended to assist
the Company in complying with these requirements. While the
Company has committed that it will not utilize the ownership
limit in its articles of incorporation as an anti-takeover
device, these provisions could still deter, delay or defer
someone from taking control of the Company.
Terrorist attacks and other acts of violence or war could have a
material adverse effect on the Company’s business and
operating results. Attacks or armed conflicts that directly
impact one or more of the Company’s apartment communities
could significantly affect the Company’s ability to operate
those communities and thereby impair its ability to achieve the
Company’s expected results. Further, the Company’s
insurance coverage may not cover any losses caused by a
terrorist attack. In addition, the adverse effects that such
violent acts and threats of future attacks could have on the
U.S. economy could similarly have a material adverse effect
on the Company’s business and results of operations.
Finally, if the United States enters into and remains engaged in
a wider armed conflict, the Company’s business and
operating results could be adversely effected.
None.
15
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
At December 31, 2006, the Company owned 59
Post®
multifamily apartment communities, including two communities
held in unconsolidated entities and two communities in
lease-up
that were partially operating during 2006. These communities are
summarized below by metropolitan area.
Thirty-five of the communities have in excess of 300 apartment
units, with the largest community having a total of 1,334
apartment units. The average age of the communities is
approximately nine years. The average economic occupancy rate
was unchanged at 94.7% for the years ended December 31,
2006 and 2005, and the average monthly rental rate per apartment
unit was $1,163 and $1,106, respectively, for the 48 communities
stabilized for each of the years ended December 31, 2006
and 2005. See “Selected Financial Information.”
At December 31, 2006, the Company also had 826 apartment
units in two communities and the expansion of one community
currently under construction.
At December 31, 2006, the Company is also developing two
ground-up
condominium projects, consisting of 230 homes. The Company is
also converting apartment homes in four communities initially
consisting of 597 units (including 121 units in one
community held in an unconsolidated entity) into for-sale
condominium homes through a taxable REIT subsidiary, at
December 31, 2006.
16
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
COMMUNITY
INFORMATION
17
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
18
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
The Company has previously disclosed litigation brought by an
alleged Company shareholder against the Company, certain members
of the Company’s board of directors, and certain of its
executive officers, seeking, among other things, inspection of
certain corporate records. On December 22, 2006, the
parties to the litigation agreed to settle any and all claims
that the parties had or may have had with respect to the
previously-disclosed actions styled Amy Vasquez v. Robert
L. Anderson, et al., Civil Action
No. 2003-CV-69140,
Clem Fowler v. Robert C. Goddard, III, et al.,
Civil Action
No. 2003-CV-69608,
Superior Court of Fulton County, Georgia, Ronald S.
Leventhal v. Robert C. Goddard, III, et al., Superior
Court of Fulton County, Georgia, Civil Action
No. 2004-CV-85875,
Ronald S. Leventhal v. Robert C. Goddard, III,
et al., United States District Court for the Northern
District of Georgia, Civil Action Number 1:04-CV-1445, Post
Properties, Inc. v. John Does 1-5, Civil Action
No. 2005-CV-105244,
Superior Court of Fulton County, Georgia, and certain other
related matters. In reaching this settlement, the Company and
the individual defendants did not pay any money to the
shareholder and denied any and all liability. All litigation
embraced by the settlement has been dismissed with prejudice.
In November 2006, the Equal Rights Center filed a lawsuit
against the Company and the Operating Partnership in the United
States District Court for the District of Columbia. This suit
alleges various violations of the Fair Housing Act and the
Americans with Disabilities Act at properties designed,
constructed or operated by the Company and the Operating
Partnership in the District of Columbia, Virginia, Colorado,
Florida, Georgia, New York, North Carolina and Texas. The
plaintiff seeks compensatory and punitive damages in unspecified
amounts, an award of attorneys’ fees and costs of suit, as
well as preliminary and permanent injunctive relief that
includes retrofitting multi-family units and public use areas to
comply with the Fair Housing Act and the Americans with
Disabilities Act and prohibiting construction or sale of
noncompliant units or complexes. Due to the preliminary nature
of the litigation, it is not possible to predict or determine
the outcome of the legal proceeding, nor is it possible to
estimate the amount of loss, if any, that would be associated
with an adverse decision.
The Company is involved in various other legal proceedings
incidental to its business from time to time, most of which are
expected to be covered by liability or other insurance.
Management of the Company believes that any resolution of
pending proceedings or liability to the Company which may arise
as a result of these various other legal proceedings will not
have a material adverse effect on the Company’s results of
operations or financial position.
None.
19
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
ITEM X. EXECUTIVE
OFFICERS OF THE REGISTRANT
The persons who are executive officers of the Company and its
affiliates and their positions as of February 15, 2007 are
as follows:
The following is a biographical summary of the experience of the
executive officers of the Company:
David P. Stockert. Mr. Stockert is the
President and Chief Executive Officer of the Company.
Mr. Stockert has been the Chief Executive Officer since
July 2002. From January 2001 to June 2002, Mr. Stockert was
President and Chief Operating Officer. From July 1999 to October
2000, Mr. Stockert was Executive Vice President of Duke
Realty Corporation, a publicly traded real estate company. From
June 1995 to July 1999, Mr. Stockert was Senior Vice
President and Chief Financial Officer of Weeks Corporation, also
a publicly traded real estate company that was a predecessor by
merger to Duke Realty Corporation. From August 1990 to May 1995,
Mr. Stockert was an investment banker in the Real Estate
Group at Dean Witter Reynolds Inc. (now Morgan Stanley).
Mr. Stockert is 44 years old.
Thomas D. Senkbeil. Mr. Senkbeil has been
an Executive Vice President and Chief Investment Officer of the
Company since June 2003. From July 2000 to December 2002,
Mr. Senkbeil was President and Chief Operating Officer of
Carter & Associates, a leading regional full-service
real estate firm, overseeing the daily operation of
Carter’s four business units: Brokerage, Corporate Real
Estate Services, Development, and Property Management and
Leasing. Prior to joining Carter & Associates,
Mr. Senkbeil was Chief Investment Officer and a member of
the board of directors at Duke Realty Corporation and its
predecessor, Weeks Corporation, from June 1992 to July 2000.
Mr. Senkbeil is 57 years old.
Thomas L. Wilkes. Mr. Wilkes has been an
Executive Vice President and President of Post Apartment
Management since January 2001. From October 1997 through
December 2000, he was an Executive Vice President and Director
of Operations for Post Apartment Management responsible for the
operations of Post communities in the Western United States.
Mr. Wilkes was a Senior Vice President of Columbus Realty
Trust from December 1993 through October 1997. Mr. Wilkes
served as President of CRH Management Company, a member of the
Columbus Group, from its formation in October 1990 to December
1993. Mr. Wilkes is a Certified Property Manager.
Mr. Wilkes is 47 years old.
Christopher J. Papa. Mr. Papa has been an
Executive Vice President and Chief Financial Officer of the
Company since December 2003. Prior to joining the Company, he
was an audit partner at BDO Seidman, LLP from June 2003 to
November 2003, the Chief Financial Officer at Plast-O-Matic
Valves, Inc., a privately-held company, from June 2002 to June
2003, and until June 2002, an audit partner at Arthur Andersen
LLP where he was employed for over 10 years. Mr. Papa
is a Certified Public Accountant. Mr. Papa is 41 years
old.
Sherry W. Cohen. Ms. Cohen has been with
the Company for twenty two years. Since October 1997, she has
been an Executive Vice President of Post Corporate Services
responsible for supervising and coordinating legal affairs and
insurance. Since April 1990, Ms. Cohen has also been
Corporate Secretary. She was a Senior Vice President with Post
Corporate Services from July 1993 to October 1997. Prior
thereto, Ms. Cohen was a Vice President of Post Properties,
Inc. since April 1990. Ms. Cohen is 52 years old.
Arthur J. Quirk. Mr. Quirk has been a
Senior Vice President and Chief Accounting Officer of the
Company since January 2003. Mr. Quirk served as the
Company’s Vice President and Chief Accounting Officer from
March 2001 to December 2002. From July 1999 to March 2001,
Mr. Quirk was Vice President and Controller of Duke Realty
Corporation, a publicly traded real estate company. From
December 1994 to July 1999, Mr. Quirk was the Vice
President and Controller of Weeks Corporation, also a publicly
traded real estate company that was a predecessor by merger to
Duke Realty Corporation. Mr. Quirk is a Certified Public
Accountant. Mr. Quirk is 48 years old.
20
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
The Company’s common stock is traded on the New York Stock
Exchange (“NYSE”) under the symbol “PPS.”
The following table sets forth the quarterly high and low prices
per share reported on the NYSE, as well as the quarterly
dividends declared per share:
On February 15, 2007, the Company had 1,539 common
shareholders of record and 43,565 shares of common stock
outstanding.
The Company pays regular quarterly dividends to holders of
shares of its common stock. Future dividend payments by the
Company will be paid at the discretion of the board of directors
and will depend on the actual funds from operations of the
Company, the Company’s financial condition and capital
requirements, the annual distribution requirements under the
REIT provisions of the Internal Revenue Code of 1986, as amended
(the “Code”) and other factors that the board of
directors deems relevant. For a discussion of the Company’s
credit agreements and their restrictions on dividend payments,
see note 4 to the consolidated financial statements.
During 2006, the Company did not sell any unregistered
securities.
There is no established public trading market for the Common
Units. On February 15, 2007, the Operating Partnership had
49 holders of record of Common Units and 648 Common Units
outstanding, excluding the 43,565 of Common Units owned by the
Company.
For each quarter during 2006 and 2005, the Operating Partnership
paid a cash distribution to holders of Common Units equal in
amount to the dividends paid on the Company’s common stock
for such quarter.
During 2006, the Operating Partnership did not sell any
unregistered securities.
In the fourth quarter of 2006, the Company’s board of
directors adopted a new stock repurchase program under which the
Company may repurchase up to $200,000 of common or preferred
stock at market prices from time to time until December 31,
2008. Under its previous stock repurchase program which expired
on December 31, 2006, the Company repurchased approximately
109 shares of its common stock totaling approximately
$5,000 at an average price of $45.70 under 10b5-1 stock purchase
plans in 2006. The Company also repurchased approximately
1,031 shares of its common stock totaling approximately
$34,400 at an average price of $33.38 under 10b5-1 stock
purchase plans in 2005. The approximate dollar value of shares
that may yet be purchased under repurchase plans shown below at
December 31, 2006 reflects amounts available under the
Company’s old program which has expired and been replaced
with the new program discussed above. The following table
summarizes the Company’s purchases of its equity securities
in the three months ended December 31, 2006 (in thousands,
except per share amounts).
21
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
Post
Properties, Inc.
(In thousands, except per share and apartment unit data)
22
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
Post
Apartment Homes, L.P.
(In thousands, except per unit and apartment unit data)
23
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
Post Properties, Inc. and its subsidiaries develop, own and
manage upscale multifamily 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
December 31, 2006, the Company owned 21,745 apartment units
in 61 apartment communities, including 545 apartment units in
two communities held in unconsolidated entities and 1,181
apartment units in four communities (and the expansion of one
community) currently under construction
and/or in
lease-up.
The Company is also developing 230 for-sale condominium homes
and is converting apartment homes in four communities initially
consisting of 597 units (including 121 units in one
community held in an unconsolidated entity) into for-sale
condominium homes through a taxable REIT subsidiary. At
December 31, 2006, approximately 44.5%, 18.8%, 12.1% and
9.7% (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 December 31, 2006, the Company owned approximately 98.4%
of the common limited partnership interests (“Common
Units”) in the Operating Partnership. Common Units held by
persons other than the Company represented a 1.6% common
minority interest in the Operating Partnership.
In the four year period prior to 2005, the multifamily apartment
sector was adversely impacted by the supply of multifamily
apartments outpacing demand, due primarily to the availability
of capital and the low interest rate environment, demand for
multifamily apartments that was adversely impacted by weakness
in the overall U.S. economy and the job market, as well as
increased rates of homeownership due primarily to historically
low mortgage interest rates. In particular, the Sunbelt markets
in which a substantial portion of the Company’s apartment
communities are located were adversely impacted.
Beginning in 2005, the Company’s operating results
benefited from improved fundamentals in the multifamily
apartment market, due primarily to improved job growth and
overall growth in the U.S. economy and job market,
increasing mortgage interest rates and single-family housing
prices which have decreased the affordability of housing, as
well as moderation in the supply of new market-rate apartments
in the primary markets and submarkets where the Company
operates. The rate of improvement in multifamily market
fundamentals continued to accelerate in 2006, as interest rates
continued to increase through the first half of the year, the
for-sale housing markets began to weaken as a result of higher
interest rates and excess inventories, and the
U.S. economic and overall job growth climate and outlook
continued to be favorable throughout the year. This is evidenced
by stronger year over year increases in same store operating
revenues and property net operating income (“NOI”) of
5.4% and 6.0%, respectively, in 2006 compared to 3.1% and 2.9%,
respectively, in 2005. The Company expects that these factors
will continue to favorably impact apartment market fundamentals
in 2007. The Company is forecasting continued growth in same
store community revenues and NOI at rates similar to 2006 as
more fully discussed in the “Outlook” section below.
The Company has also been active over the past several years
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 met
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
Post®
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 reinvesting in assets that the Company believes
demonstrate better growth potential.
In this regard, the Company disposed of 3,880, 3,047 and 1,340
apartment units in 2004, 2005 and 2006, respectively, for
aggregate gross proceeds of approximately $243,000, $232,000 and
$175,000 in 2004, 2005 and 2006, respectively. During this same
period, the Company acquired 499, 319 and 819 apartment units
for aggregate gross purchase prices of approximately $85,814,
$37,250 and $152,000 in 2004, 2005 and 2006, respectively.
24
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
The Company also re-commenced development activities in late
2004 with its start of a new 350 unit mixed-use, for-rent
apartment and for-sale condominium project located in
Alexandria, Virginia, the start of two for-rent apartment
projects and one expansion, totaling 826 units, in Atlanta,
Georgia, Dallas, Texas and Tampa, Florida in 2006 and the start
of an 85 unit for-sale condominium project in Dallas, Texas
in 2006. The Company also expects to begin additional
development projects in 2007 and 2008.
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. As a result, the Company launched a new for-sale
brand, Post Preferred
Homestm,
which serves as the unified marketing umbrella for the
Company’s for-sale ventures, including developing new
communities and converting existing apartment communities into
upscale for-sale housing in several key markets.
In 2005, the Company, through a taxable REIT subsidiary,
commenced the conversion of three existing apartment communities
consisting of a total of 382 units into for-sale
condominium homes, including one in an unconsolidated entity,
located in Atlanta, Georgia, Dallas, Texas and Tampa, Florida.
One of these communities, containing 134 units, located in
Tampa, Florida, was completely sold out in 2005. The other two
communities were substantially sold out by the end of 2006.
During 2006, the Company, through a taxable REIT subsidiary,
also commenced the conversion of a portion of two additional
existing apartment communities consisting of a total of
349 units into for-sale condominium homes, located in
Houston, Texas and Tampa, Florida. These two communities began
closing condominium sales in the second quarter of 2006.
Recently, there has been a softening in the condominium and
single family housing markets due to increasing mortgage
financing rates, increasing supplies of such assets and a
perceived slow down in the residential housing market and
overall economic activity in the U.S. As a result, the pace
of condominium closings slowed in the second half of 2006. It is
likely that condominium closings will continue to be slow at
these communities into 2007. There can be no assurance of the
amount or pace of future for-sale condominium sales and closings.
In 2007, the Company expects to begin closing condominium
contracts at its two newly developed for-sale condominium
projects, containing 230 homes. As of February 15, 2007,
the Company had in excess of 100 condominium homes under
contract at these communities. These homes are expected to begin
closing in the second quarter of 2007. There can be no
assurances that condominium homes under contract at these
communities will close.
The Company’s expansion into for-sale condominium housing
exposes the Company to new 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
December 31, 2006, the Company had approximately $93,000 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 projected development costs
expected to be funded relating to two for-sale projects
currently under construction. In addition, the Company also had,
in the aggregate, approximately $108,711 of land held for future
development and net investments in unconsolidated land entities
as of December 31, 2006, of which a portion may be used to
develop future for-sale condominium projects depending upon
market conditions. There can be no assurance, however, that land
held for future development will be used for such purposes or
whether developments will actually commence. See “Risk
Factors” elsewhere in this
Form 10-K
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 their results of operations and
financial condition are substantially the same except for the
effect of the 1.9% and 5.0% weighted average common minority
interest in the Operating Partnership in 2006 and 2005,
respectively. See the summary financial information in the
section below titled, “Results of Operations.”
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 three months ending March 31, 2007 and
the year ending December 31, 2007 (including the
Company’s assumptions for such performance and expected
levels
25
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
of costs and expenses to be incurred in 2007), anticipated
apartment community sales in 2007 (including the 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,
accounting recognition and measurement of guarantees,
anticipated refinancing and other new financing needs, the
anticipated dividend level in 2007, the Company’s ability
to meet new construction, development and other long-term
liquidity requirements, and its ability to execute future asset
sales. 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:
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.
In the preparation of financial statements and in the
determination of Company operating performance, the Company
utilizes certain significant accounting polices and these
accounting policies are discussed in note 1 to the
Company’s consolidated financial statements. Also discussed
in note 1 to the consolidated financial statements, there
are new accounting pronouncements issued in 2006 and 2005 that
may have an impact on future reported results. The potential
impact of certain new pronouncements on the Company is discussed
below and in the consolidated financial statements. As the
Company is in the business of developing, owning and managing
apartment communities and developing, converting and selling
for-sale condominiums, its critical accounting policies, ones
that are subject to significant management estimates and
judgments, relate to cost capitalization, asset impairment
evaluation and revenue and profit recognition of for-sale
condominium activities.
For communities under development or rehabilitation, the Company
capitalizes interest, real estate taxes, and certain internal
personnel and associated costs directly related to apartment
communities under development and construction. Interest
capitalized to projects under development or construction can
fluctuate significantly from year to year based on the level of
projects under development or construction and to a lesser
extent, changes in the weighted average interest rate used in
the calculation. For the years ended December 31, 2006,
2005 and 2004, the Company capitalized interest totaling
26
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
$9,942, $2,907 and $1,078, respectively. The increase in 2006
primarily relates to a significantly increased development
pipeline as the Company recommenced development activities over
the last few years with four new construction starts in 2006 and
with several additional projects in development. The weighted
average interest rates used in the calculation of the
capitalized interest amounts ranged from 6.6% in 2006 to 7.2% in
2004 and, as a result, were not the primary driver of the
changes in interest capitalization discussed above. In future
periods, the Company anticipates an increase in development
activity in three regional markets which will result in
increased interest capitalization over 2006 levels. Aggregate
interest capitalization is expected to increase in 2007 even as
the average interest rate used in the calculation is expected to
be substantially the same as in 2006. Due to the predominately
fixed rate nature of the Company’s debt, future increases
or decreases in short-term interest rates are not expected to
have a significant impact on the weighted average interest rate
used for interest capitalization purposes. Future increases in
short-term and long-term interest rates over time would cause an
increase in the weighted average rate used for capitalization
and cause interest amounts capitalized to increase.
Internal personnel and associated costs are capitalized to the
projects under development or construction based upon the effort
associated with such projects. In 2004, the Company expensed
$2,930 of development personnel and associated costs. In 2005
and 2006, the Company increased its development personnel in
three regional geographic areas in anticipation of increased
development activity in 2006 and in future periods. In 2006 and
2005, the Company expensed $6,424 and $4,711, respectively, of
development personnel and associated costs. If future
development volume increases over 2006 levels, a significant
portion of such costs may be capitalized to development projects.
The Company continually evaluates the recoverability of the
carrying value of its real estate assets using the methodology
summarized in its accounting policies (see note 1 to the
consolidated financial statements). Under current accounting
literature, the evaluation of the recoverability of the
Company’s real estate assets requires the judgment of
Company management in the determination of the value of the
future cash flows expected from the assets and the estimated
holding period for the assets. The Company uses market
capitalization rates to determine the estimated residual value
of its real estate assets and, generally, takes a long-term view
of the holding period of its assets unless specific facts and
circumstances warrant shorter holding periods (expected sales,
departures from certain geographic markets, etc.). At
December 31, 2006 and 2005, management believed it had
applied reasonable estimates and judgments in determining the
proper classification of its real estate assets. The Company
believes the actual results of prior year dispositions have
validated the Company’s methodology discussed herein.
Should external or internal circumstances change requiring the
need to shorten the holding periods or adjust the estimated
future cash flows of certain of the Company’s assets, the
Company could be required to record future impairment charges.
As discussed in note 2 to the consolidated financial
statements, the Company recorded impairment losses in 2004 on
assets held for sale or for investment under the application of
its policies.
In 2005, the Company entered into the for-sale condominium
business. At December 31, 2006, the Company is selling
condominiums at several condominium conversion communities and
at two newly developed communities. Under SFAS No. 66,
the Company recognizes revenue and the resulting profit from
condominium sales based on the relevant facts and circumstances
associated with each condominium project. For condominium
conversion projects, revenues are recognized upon the closing of
each sale transaction (the “Completed Contract
Method”), as all conditions for full profit recognition are
generally met at the time and the conversion construction
periods are typically very short. In 2005 and 2006, all
condominium sales were at condominium conversion projects.
Under SFAS No. 66, the Company uses the relative sales
value method to allocate costs and recognize profits from
condominium conversion sales. Under the relative sales value
method, estimates of aggregate project revenues and aggregate
project costs are used to determine the allocation of project
cost of sales and the resulting profit in each accounting
period. In subsequent periods, project cost of sale allocations
and profits are adjusted to reflect changes in the actual and
estimated costs and estimated revenues of each project.
Unexpected increases or decreases in estimated project revenues
and project costs could cause future cost of sale and profit
margin amounts recognized in the financial statements to be
different than the amounts recognized in prior periods. As the
Company continues to be active in the condominium business in
future periods, changes in estimates of this nature could have a
significant impact on reported future results from operations.
For newly developed condominiums, the Company will evaluate the
factors specified in SFAS No. 66 to determine the
appropriate method of accounting for each project (either the
“Percentage of Completion Method” or the
“Completed Contract Method”). The factors used to
determine the appropriate method are a determination of whether:
the purchaser is legally committed to closing in the real estate
contract; the construction of the project is beyond a
preliminary phase; sufficient units have been contracted to
ensure the project will not revert to a rental project; the
aggregate project sale proceeds and costs can be reasonably
estimated; and the buyer has made an adequate initial and
continuing cash investment under the contract in accordance with
SFAS No. 66. Under the Percentage of Completion
Method, revenues
27
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
and the associated profit would be recognized over the project
construction period based on the ratio of total project costs
incurred to estimated total project costs. The determination of
the profit margins to be reported also requires an estimate of
the estimated aggregate revenues to be generated from
condominium sales. Increases in estimated revenues and decreases
in estimated costs over time would lead to increased profit
recognition in future periods. Likewise, decreases in estimated
revenues and increases in estimated costs over time would lead
to reductions in profit margins in future periods. Additionally,
contracts terminated prior to closing under the Percentage of
Completion Method would result in the reversal of previously
recognized profits and such amounts could be material under
market conditions that may lead to a general market value
decline for condominiums.
At December 31, 2006, the Company had two new condominium
projects under development with approximately 43% of the
condominium homes under contract. As the initial and continuing
cash investments received do not meet the requirements of
SFAS No. 66, as well as other factors, the Company has
concluded that these sales and profits at these projects will be
accounted for under the Completed Contract Method, similar to
the accounting for condominium conversion projects discussed
above.
In November 2006 the Financial Accounting Standards Board
(“FASB”) ratified EITF Issue
No. 06-8
(“EITF
No. 06-8”),
“Applicability of the Assessment of a Buyer’s
Continuing Investment under FASB Statement No. 66 for Sales
of Condominiums.” EITF
No. 06-8
provides additional guidance on whether the seller of a
condominium unit is required to evaluate the buyer’s
continuing investment under SFAS No. 66 in order to
recognize profit from the sale under the percentage of
completion method. The EITF concluded that both the buyer’s
initial and continuing investment must meet the criteria in
SFAS No. 66 in order for condominium sale profits to
be recognized under the percentage of completion method. Sales
of condominiums not meeting the continuing investment test must
be accounted for under the deposit method (a method consistent
with the Company’s above stated Completed Contract Method).
EITF
No. 06-8
is effective January 1, 2008. As discussed above, the
Company accounts for condominium sales using similar criteria to
those stated in EITF
No. 06-8.
As a result, the Company does not expect the adoption of EITF
No. 06-8
to have a material impact on the Company’s financial
position or results of operations.
The Emerging Issues Task Force issued EITF
No. 04-5
(“EITF
No. 04-5”),
“Determining Whether a General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar
Entity When the Limited Partners Have Certain Rights.” EITF
No. 04-5
provides a framework for evaluating whether a general partner or
group of general partners or managing members controls a limited
partnership or limited liability company and therefore should
consolidate the entity. The presumption that the general partner
or group of general partners or managing members controls a
limited partnership or limited liability company may be overcome
if the limited partners or members have (1) the substantive
ability to dissolve the partnership without cause, or
(2) substantive participating rights. EITF
No. 04-5
became effective on September 30, 2005 for new or modified
limited partnerships or limited liability companies and
January 1, 2006 for all existing arrangements. The Company
adopted EITF
No. 04-5
on January 1, 2006 for all existing partnerships and
limited liability companies and the adoption did not have a
material impact on the Company’s financial position or
results of operations.
FASB Interpretation No. 48 (“FIN 48”),
“Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement 109,” was issued in
July 2006. FIN 48 clarifies guidance on the recognition and
measurement of uncertain tax positions and establishes a more
likely than not standard for the evaluation of whether such tax
positions can be recognized in the Company’s financial
statements. Previously recognized tax positions that do not meet
the more likely than not criteria will be required to be
adjusted on the implementation date. FIN 48 is effective
for the Company on January 1, 2007. Additionally,
FIN 48 requires additional disclosure regarding the nature
and amount of uncertain tax positions, if any. The Company has
performed an analysis and does not expect that the adoption of
FIN 48 will have a material impact on the Company’s
financial position and results of operations.
Statement of Financial Accounting Standards No. 157
(“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 are also required. SFAS No. 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and should be applied
prospectively. The Company does not expect that the adoption of
SFAS No. 157 will have a material impact on the
Company’s financial position and results of operations.
The Securities and Exchange Commission issued
SAB No. 108 (“SAB 108”),
“Considering the Effects of Prior Year Misstatements When
Quantifying Misstatements in Current Year Financial
Statements,” in September 2006. SAB 108 requires that
companies analyze the effect of financial statement
misstatements on both their balance sheet and their income
statement and contains guidance on correcting errors under this
approach. The Company applied the guidance in SAB 108 on
December 31, 2006 and, in accordance with the initial
application provisions of SAB 108, adjusted retained
28
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
earnings as of January 1, 2006. The adjustment was
considered to be immaterial individually and in the aggregate in
prior years based on the Company’s historical method of
determining materiality. The application of SAB 108 resulted in
a cumulative effect adjustment to record the prior period impact
of accounting for two ground leases with scheduled rent
increases on a straight-line basis during periods prior to
January 1, 2005, and resulted in an increase in
consolidated real estate assets of approximately $3,900, an
increase in consolidated liabilities of approximately $8,800 and
a decrease in consolidated equity of approximately $4,900
($4,700 net of minority interest).
The following discussion of results of operations should be read
in conjunction with the consolidated statements of operations,
the accompanying selected financial data and the community
operations/segment performance information included below.
The Company’s revenues and earnings from continuing
operations are generated primarily from the operation of its
apartment communities. For purposes of evaluating comparative
operating performance, the Company categorizes its operating
apartment communities based on the period each community reaches
stabilized occupancy. The Company generally considers a
community to have achieved stabilized occupancy on the earlier
to occur of (1) attainment of 95% physical occupancy on the
first day of any month or (2) one year after completion of
construction.
For the year ended December 31, 2006, the Company’s
portfolio of operating apartment communities, excluding two
communities held in unconsolidated entities, consisted of the
following: (1) 48 communities that were completed and
stabilized for all of the current and prior year,
(2) portions of two communities that are being converted
into condominiums that are reflected in continuing operations
under SFAS No. 144 (see note 1 to the
consolidated financial statements), (3) four operating
communities that were acquired in 2006 and 2005, and
(4) four communities in development, rehabilitation and
lease-up.
These operating segments exclude the operations of apartment
communities classified as discontinued operations, condominium
conversion communities classified as discontinued operations and
apartment communities held in unconsolidated entities for the
years presented.
The Company has adopted an accounting policy related to
communities in the
lease-up
stage whereby substantially all operating expenses (including
pre-opening marketing and management and leasing personnel
expenses) are expensed as incurred. During the
lease-up
phase, the sum of interest expense on completed units and other
operating expenses (including pre-opening marketing and
management and leasing personnel expenses) will initially exceed
rental revenues, resulting in a
“lease-up
deficit,” which continues until such time as rental
revenues exceed such expenses. The
lease-up
deficit for the year ended December 31, 2006 was
approximately $460. There were no
lease-up
deficits in 2005 and 2004, as no communities were in the
lease-up
stage.
In order to evaluate the operating performance of its
communities for the comparative years listed below, the Company
has presented financial information which summarizes the rental
and other revenues, property operating and maintenance expenses
(excluding depreciation and amortization) and net operating
income on a comparative basis for all of its operating
communities and for its stabilized operating communities. Net
operating income is a supplemental non-GAAP financial measure.
The Company believes that the line on the Company’s
consolidated statement of operations entitled “net
income” is the most directly comparable GAAP measure to net
operating income. Net operating income is reconciled to GAAP net
income in the financial information accompanying the tables. The
Company believes that net operating income is an important
supplemental measure of operating performance for a REIT’s
operating real estate because it provides a measure of the core
operations, rather than factoring in depreciation and
amortization, financing costs and general and administrative
expenses. This measure is particularly useful, in the opinion of
the Company, in evaluating the performance of geographic
operations, operating segment groupings and individual
properties. Additionally, the Company believes that net
operating income, as defined, is a widely accepted measure of
comparative operating performance in the real estate investment
community.
29
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
Comparison
of Year Ended December 31, 2006 to Year Ended
December 31, 2005
The operating performance from continuing operations for all of
the Company’s apartment communities summarized by segment
for the years ended December 31, 2006 and 2005 is
summarized as follows:
30
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
The Operating Partnership reported net income available to
common unitholders of $95,649 and $141,410 for the years ended
December 31, 2006 and 2005, respectively, and the Company
reported net income available to common shareholders of $93,832
and $134,311 for the years ended December 31, 2006 and
2005, respectively. The decline in net income in 2006, compared
to 2005, primarily reflected reduced gains on operating
community sales of approximately $56,101 and reduced gains on
condominium sales of $3,084, offset somewhat by the improved
performance of the Company’s fully stabilized communities
and increased interest capitalization due to a growing
development pipeline. These items are discussed in more detail
in the sections below.
Rental and other property revenues increased $19,453 or 6.9%
from 2005 to 2006 primarily due to increased revenues from the
Company’s stabilized communities of $12,944 or 5.4% and
acquired communities of $8,588. The revenue increase from
stabilized communities is discussed below. The revenue increase
from acquired communities reflects the acquisition of one
community in June 2005, two communities in March 2006 and one
community in July 2006. Property operating and maintenance
expenses (exclusive of depreciation and amortization) increased
$9,057 or 7.1% primarily due to increased expenses from
stabilized communities and acquisition communities. The expense
increase from stabilized communities is discussed below. The
expense increase from acquisition communities reflects the full
year of expenses from one operating community acquired in June
2005 and a partial year of expenses for the three operating
communities acquired during 2006.
In 2006, gains on sales of real estate assets in discontinued
operations represented the net gains of $225 ($221 net of
minority interest) from condominium sales at the Company’s
condominium conversion communities and gains of
31
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
$68,324 ($67,026 net of minority interest) on the sale of
three communities containing 1,340 apartment units. The sales of
the three communities generated net proceeds of approximately
$173,007, including $40,000 of secured indebtedness assumed by
the purchasers. In 2005, gains on sales of real estate assets in
discontinued operations represented the net gains of $16,218
($15,404 net of minority interest) from condominium sales
at the Company’s condominium conversion communities and
gains of $124,425 ($117,593 net of minority interest) on
the sale of six communities containing 3,047 apartment units.
The sales of the six communities generated net proceeds of
approximately $229,249, including $81,560 of tax-exempt secured
indebtedness assumed by the purchasers. The Company plans to
continue to be a seller of communities in 2007 depending upon
market conditions and consistent with its investment strategy of
recycling investment capital to fund new development and
acquisition activities in its core markets. See also the Outlook
section below for a discussion of condominium profit
expectations in 2007.
Depreciation expense decreased $3,107, or 4.4% from 2005 to 2006
primarily due to reduced depreciation resulting from certain
furniture and fixtures (with a five year life) at certain
properties becoming fully depreciated in 2005 and the cessation
of depreciation expense in late 2005 on portions of two
communities being converted into condominiums that continue to
be reported in continuing operations under
SFAS No. 144. These decreases in depreciation expense
between periods were offset by increased depreciation in 2006 on
communities acquired in June 2005, March 2006 and July 2006.
Interest expense included in continuing operations decreased
$1,589 or 2.9% from 2005 to 2006. The decreased expense amounts
between periods reflects the impact of increased interest
capitalization on its development projects of $7,035 between
years, offset by higher interest costs on higher debt levels due
to apartment community acquisitions and land acquisitions in
2005 and the first half 2006. Interest expense included in
discontinued operations decreased from $5,421 in 2005 to $2,673
in 2006 primarily due to interest expense associated with six
communities sold in 2005 and one community sold in the third
quarter of 2006.
General and administrative expenses increased $195, or 1.1%,
from 2005 to 2006 primarily due to higher compensation costs
offset by reduced legal, professional fees and the cumulative
effect of the adoption of SFAS 123R for recognizing
stock-based compensation. Higher compensation costs of
approximately $644 reflected annual compensation increases,
increased personnel costs associated with internalizing
compliance activities and annual incentive awards to management.
Legal fees decreased by approximately $55 due to a legal expense
recovery of approximately $179 related to prior year shareholder
litigation. Professional fees decreased approximately $382 in
2006 primarily due to savings in annual audit and Sarbanes/Oxley
compliance costs as the Company internalized more of such
efforts in 2006. In the first quarter of 2006, the Company
implemented SFAS 123R. As the Company had recorded
stock-based compensation expense under SFAS 123 since 2003
using the actual forfeiture method for early terminations of
awards, the implementation of SFAS 123 using the estimated
forfeiture method required by SFAS 123R resulted in a
one-time reduction of general and administrative expenses of
approximately $100 in the first quarter of 2006. The aggregate
one-time reduction of expenses resulting from the adoption of
SFAS 123R totaled $172, with $72 recorded as reductions of
investment and development expenses and property operating
expenses. The one-time effect of implementing SFAS 123R
will not recur in future periods.
Investment, development and other expenses increased $1,713 or
36.4% from 2005 to 2006 primarily due to the continued increase
in development personnel and other costs to establish and grow
the Company’s development capabilities in three regional
markets in 2005 and 2006 and the write-off of approximately $484
of pursuit costs related to abandoned investment activities.
Increased gross costs were somewhat offset by $665 of increased
capitalization of development personnel to an increasing
development pipeline in 2006.
Equity in income of unconsolidated real estate entities
increased $46 or 2.6% from 2005 to 2006. Equity in income
increased approximately $153 due to the improved operating
performance of the two stabilized communities held in two
entities offset by reduced net gains from condominium sales and
reduced net operating income in 2006 at the unconsolidated
entity that was converting its apartment community into
condominiums in 2005 and 2006. The reduced net operating income
reflects the reduction in rental units throughout the conversion
process and the reduced net gains from condominium sales
reflects reduced sale prices and margins in 2006 in order to
maintain a modest sales pace. See note 5 to the
consolidated financial statements for a summary of the operating
results of the Company’s unconsolidated entities.
Annually recurring and periodically recurring capital
expenditures from continuing operations increased $3,525 or
27.2% from 2005 to 2006. The increase in annually recurring
capital expenditures of $1,955 primarily reflects the impact of
several properties beginning to capitalize the replacement of
carpet, vinyl and blinds in mid-2005 and into 2006 under the
Company’s accounting policies (during the first five years
of a community, the Company expenses the replacements of these
items) as well as leasing office upgrades at several communities
in 2006. The increase in periodically recurring capital
expenditures of $1,570 primarily reflects increased tenant
improvements at the Company’s office and retail properties
as well as the timing of large structural expenditures between
periods.
32
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
Fully
Stabilized (Same Store) Communities
The Company defines fully stabilized communities as those which
have reached stabilization prior to the beginning of the
previous year. For the 2006 to 2005 comparison, fully stabilized
communities are defined as those communities which reached
stabilization prior to January 1, 2005. This portfolio
consisted of 48 communities with 17,955 units, including 21
communities with 8,284 units (46.1%) located in Atlanta,
Georgia, 12 communities with 3,607 units (20.1%) located in
Dallas, Texas, 3 communities with 1,877 units (10.5%)
located in Tampa, Florida, 4 communities with 1,703 units
(9.5%) located in Washington D.C. and 8 communities with
2,484 units (13.8%) located in other markets. The operating
performance of these communities is summarized as follows:
33
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
Rental and other property revenues increased $12,944 or 5.4%
from 2005 to 2006. This increase resulted primarily from a 5.2%
increase in the average monthly rental rate per apartment unit
as the average economic occupancy of the portfolio was
consistent between years at 94.7%. This increase in average
rental rates resulted in a revenue increase of approximately
$12,256 between years. This increase in revenue related to
rental rates was offset somewhat by increased vacancy losses of
$959 primarily due to vacancy losses being measured at higher
rental rates in 2006. Additionally, other property revenues
increased $1,269 as a result of higher up-front leasing fees and
higher utility reimbursements from residents due to increased
utility expenses, lower net concessions of $377 due to the
favorable impact of straight-lining net rentals due to generally
reduced concessions in a stronger rental market in 2006.
Overall, the improving performance of the operating portfolio
reflects improved market conditions (strong job growth in most
of the Company’s markets, a strong and steady
U.S. economy and a weakening for-sale housing market due to
higher interest rates and excess inventories in some markets),
with the Company’s operations in all of its markets
reporting increased revenues in excess of 3.5%. In addition in
2006, the Company completed the installation of automated
revenue pricing software at the majority of its operating
communities. The Company believes this automated pricing
software implementation partially contributed to the increased
revenues in 2006. With continuing strong market fundamentals in
place, with the automated pricing software in place at year end
and with anticipated stable occupancy rates expected in 2007,
the Company’s strategy will continue to be focused on
increasing average rental rates in 2007. See the
“Outlook” section below for an additional discussion
of trends for 2007.
Property operating and maintenance expenses (exclusive of
depreciation and amortization) increased $4,129 or 4.5% from
2005 to 2006. This increase was primarily due to increased
property tax expenses of $1,830 or 6.4%, increased utility
expenses of $706 or 5.6%, increased personnel expenses of $759
or 3.4%, increased other property expenses of $867 or 31.1%,
increased insurance expenses of $494 or 12.9% offset by
decreased advertising and promotion expenses of $847 or 19.8%.
Property tax expenses increased due to increased property
valuations in 2006 and more favorable tax settlements recorded
in 2005. Utility expenses increased primarily due to generally
higher electric and gas rates. Personnel costs increased
primarily due to annual salary increases. Other property
expenses increased primarily due to costs associated with the
automated revenue pricing software and use of third party call
centers that were phased into the portfolio generally in the
second half of 2006. Insurance expenses increased due to an
approximate 29% increase in property insurance rates on renewal
in the fourth quarter of 2006 primarily related to market
increases in catastrophic coverage in coastal regions. The
decrease in advertising and promotions expense in 2006 primarily
reflects reduced payments to apartment locator services
resulting from more favorable market conditions and lower
resident turnover between periods. See the “Outlook”
section below for an additional discussion of trends
in 2007.
Comparison
of Year Ended December 31, 2005 to Year Ended
December 31, 2004
For the purposes of comparative operating performance, the
Company categorizes its operating communities based on the
period each community reaches stabilized occupancy, as defined
above. For the 2005 to 2004 comparison, the operating community
categories were based on the status of each community as of
December 31, 2005. As a result, these categories are
different from the operating community categories used in the
2006 to 2005 comparison discussed earlier in this section.
Further, the amounts reported in the table below have been
adjusted from the amounts reported in the Company’s
December 31, 2005 financial statements due to the
restatement impact of reclassifying the operating results of
assets designated as held for sale in 2006 to discontinued
operations under SFAS No. 144 (see the related
discussion under the
34
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
caption, “Discontinued Operations”). The operating
performance from continuing operations for all of the
Company’s apartment communities combined for the years
ended December 31, 2005 and 2004 is summarized as follows:
35
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
The Operating Partnership reported net income available to
common unitholders of $141,410 and $81,546 for the years ended
December 31, 2005 and 2004, respectively, and the Company
reported net income available to common shareholders of $134,311
and $76,368 for the years ended December 31, 2005 and 2004,
respectively. The improvement in net income in 2005 compared to
2004 primarily reflected increased gains on sales of real estate
assets of $27,498 ($26,958 net of minority interest and
income taxes) and a gain of $5,267 ($5,003 net of minority
interest) on the sale of a technology investment between years.
The change between years was also impacted by accounting charges
in 2004 of $20,987 ($19,637 net of minority interest)
relating to losses on early debt extinguishments, costs of
terminating a debt remarketing agreement (interest expense) and
asset impairment charges compared to debt extinguishment losses
of $3,220 ($3,043 net of minority interest) in 2005.
Additionally, net income was higher in 2005 due to the improved
operating performance of the Company’s stabilized
communities and reduced interest expense. These items are
discussed in more detail in the sections below.
Rental and other property revenues increased $14,449 or 5.4%
from 2004 to 2005 primarily due to increased revenues from the
Company’s stabilized communities of $6,980 or 3.1% and from
the Company’s newly stabilized and acquired communities of
$6,508 or 56.7%. The revenue increase from stabilized
communities is discussed below. The revenue increase from newly
stabilized communities in 2005 reflects a full year of operating
performance in 2005 for the one
36
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
community compared to a partial
lease-up
year in 2004. The revenue increase from acquired communities
reflects the acquisition of one community in May 2005 and one
community in June 2004. Property operating and maintenance
expenses (exclusive of depreciation and amortization) increased
$6,695 or 5.5% primarily due to increased expenses from
stabilized communities and acquisition communities. The expense
increase from stabilized communities is discussed below. The
expense increase from acquisition communities reflects the full
year of expenses from one community acquired in June 2004 and a
partial year of expenses for the community acquired in May 2005.
In 2005, gains on sales of real estate assets from discontinued
operations represent the net gains of $16,218 ($15,404 net
of minority interest) from condominium sales at the
Company’s condominium conversion communities and gains of
$124,425 ($117,593 net of minority interest) on the sale of
six communities containing 3,047 units. The sales of the
six communities generated net proceeds of approximately
$229,249, including $81,560 of tax-exempt secured indebtedness
assumed by the purchasers. In 2004, the Company recognized net
gains from discontinued operations of $113,739
($106,039 net of minority interest) from the sale of eight
communities containing 3,880 units, and certain land
parcels. These sales generated net proceeds of approximately
$242,962, including $104,325 of tax-exempt debt assumed by the
purchasers.
Depreciation expense decreased $3,230, or 4.4% from 2004 to 2005
primarily due to reduced depreciation resulting from certain
furniture and fixtures (with a five year life) at certain
properties becoming fully depreciated in 2004 and early 2005
offset by increased depreciation from communities acquired in
2005 and 2004.
Interest expense (excluding $10,615 in 2004 of costs associated
with the termination of a debt remarketing agreement —
discussed below) decreased $4,125 or 6.9% from 2004 to 2005 due
to reduced interest costs resulting from the refinancing of
approximately $112,000 of debt at lower fixed interest rates,
net debt repayments of fixed rate unsecured indebtedness of
approximately $100,000 during 2005 and due to $1,829 of
increased capitalized interest to development properties between
years.
In 2004, the Company terminated a remarketing agreement related
to its $100,000, 6.85% Mandatory Par Put Remarketed Securities
(“MOPPRS”) due March 2015. In connection with the
termination of the remarketing agreement, the Company paid
$10,615, including transaction expenses. Under the terms of the
remarketing agreement, the remarketing agent had the right to
remarket the $100,000 unsecured notes in March 2005 for a
ten-year term at an interest rate calculated as 5.715% plus the
Company’s then current credit spread to the ten-year
treasury rate. As a result of the termination of the remarketing
agreement, the underlying debt matured and was repaid in March
2005.
The loss on early extinguishment of indebtedness included in
continuing operations in 2004 of $4,011 represented the debt
repurchase premiums, transactions expenses and the write-off of
unamortized deferred financing costs associated with the early
retirement of debt. In October 2004, the Company purchased and
retired $87,957 of the Company’s 8.125% medium term,
unsecured notes through a tender offer. The debt was originally
scheduled to mature in 2005. The Company retired a portion of
this debt prior to maturity to take advantage of favorable lower
interest rates in late 2004 and to reduce its debt refinancing
risk in 2005.
General and administrative expenses increased $102 or 0.6% from
2004 to 2005 primarily due to increased compensation, incentive
compensation and board compensation costs offset by reduced
legal, consulting and corporate governance expenses in 2005. The
increase in annual compensation reflects annual compensation
increases and increased bonuses paid to corporate employees in
2005 due to improved Company performance. The increase in
incentive compensation reflects the increased amortization of
incentive stock awards as option award expense recognition has
increased due to the full phase-in of SFAS No. 123
over an approximately three year vesting period that began in
2003. Additionally, incentive compensation increased due to
increased restricted stock and shareholder value plan award
amortization (phased in over an approximately three year vesting
period as restricted stock and shareholder value plan awards
began to be granted annually beginning in 2003). Increased board
compensation costs resulted from increases in a director
variable deferred compensation plan which resulted from
increases in the Company’s stock price. This director plan
was amended in the third quarter of 2005. As a result, future
changes in the Company’s stock price are not expected to
have an impact on board compensation costs. These increases were
offset by reduced legal expenses of $834 between years primarily
due to reduced expenses associated with shareholder proxy
proposals, the settlement with the Company’s former
chairman and CEO in 2004 and with shareholder litigation between
periods. The decrease in consulting expenses of approximately
$620 between periods related to portfolio valuation and software
selection services incurred in 2004. Corporate governance
expenses decreased approximately $307 due to a reduction in the
costs of Sarbanes/Oxley compliance in the second full year of
those regulations.
Investment, development and other costs increased $2,312 or
78.9% from 2004 to 2005. Investment, development and other costs
of $5,242 in 2005 include $1,546 of executive and administrative
functions, $3,165 of development personnel and associated costs
and land carry costs not allocable to development projects and
$531 of sales and marketing costs
37
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
associated with for-sale condominium developments which are not
capitalized. Investment, development and other costs of $2,930
in 2004 consisted of $1,279 of executive and administrative
functions and $1,651 of development personnel and associated
costs and land carry expenses not allocable to development
projects. The majority of the increase in development personnel
and associated costs of $1,514 was primarily due to the addition
of new development personnel and to establishing development
capabilities in three regional geographic areas in mid to late
2004 and into 2005.
Equity in income of unconsolidated real estate entities
increased from $1,083 in 2004 to $1,767 in 2005. This increase
was primarily due to improving apartment market fundamentals
resulting in improved operating performance of the two
communities held by the entities and increased profits resulting
from condominium sales at one of the unconsolidated entities
that began the conversion of its apartments into for-sale
condominiums in 2005. The first closings of condominium homes
began in the second quarter of 2005. In 2005, the unconsolidated
entity closed 45 condominium homes generating net gains to the
Company of approximately $612.
Annually recurring and periodically recurring capital
expenditures from continuing operations increased $1,899 or
17.1% from 2004 to 2005. The increase in capital expenditures
included one capital project related to corrective improvements
associated with compliance with ADA regulations and the impact
of several properties beginning to capitalize the replacement of
carpet, vinyl and blinds under the Company’s accounting
policies (during the first five years of a community, the
Company expenses the replacements of these items).
Fully
Stabilized (Same Store) Communities
The Company defines fully stabilized communities as those which
have reached stabilization prior to the beginning of the
previous year. For the 2005 to 2004 comparison, fully stabilized
communities are defined as those communities which reached
stabilization prior to January 1, 2004. This portfolio
consisted of 48 communities with 18,153 units, including
22 communities with 8,842 units (48.7%) located in
Atlanta, Georgia, 13 communities with 3,939 units (21.7%)
located in Dallas, Texas, three communities with
1,883 units (10.4%) located in Tampa, Florida, three
communities with 1,204 units (6.6%) located in Washington
D.C. and seven communities with 2,285 units (12.6%) located
in other markets. The operating performance of these communities
is summarized as follows:
38
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
The Company uses same store annually recurring and periodically
recurring capital expenditures as cash flow measures. Same store
annually recurring and periodically recurring capital
expenditures are supplemental non-GAAP financial measures. The
Company believes that same store annually recurring and
periodically recurring capital expenditures are important
indicators of the costs incurred by the Company in maintaining
same store communities. The corresponding GAAP measures include
information with respect to the Company’s other operating
segments consisting of communities stabilized in the prior year,
condominium conversion communities,
lease-up
communities, and sold communities in addition to same store
information. Therefore, the Company believes that it’s
presentation of same store annually recurring and periodically
recurring capital expenditures is necessary to demonstrate same
store replacement costs over time. The Company believes that the
most directly comparable GAAP measure to same store annually
recurring and periodically recurring capital expenditures are
the lines on the Company’s consolidated statements of cash
flows entitled “annually recurring capital
expenditures” and “periodically recurring capital
expenditures.”
Rental and other property revenues increased $6,980 or 3.1% from
2004 to 2005. This increase resulted primarily from a 1.8%
increase in the average monthly rental rate per apartment unit
and an increase in average economic occupancy of the portfolio
from 93.7% to 94.6%. This increase in average rental rates
resulted in a revenue increase of approximately $4,090 between
years. The occupancy increase resulted in lower vacancy losses
of $1,467. Additionally, other property revenues increased
$1,654 as a result of higher up-front leasing fees and higher
utility reimbursements from residents due to increased utility
expenses, but were offset somewhat by higher net concessions of
$231 due to the impact of straight-lining net rentals and
concessions under generally accepted accounting principles.
Overall, the improving performance of the operating portfolio
reflects gradually improving market conditions with the
Company’s operations in all of its markets reporting
increased revenues over the prior year.
Property operating and maintenance expenses (exclusive of
depreciation and amortization) increased $2,899 or 3.3% from
2004 to 2005. This increase was primarily due to increased
utility expenses of $1,245 or 11.1%, increased maintenance and
repairs expenses of $1,333 or 14.1% and increased ground rent
expenses of $1,286 or 94.1%, offset by decreased property tax
expenses of $771 or 2.6% and decreased insurance expenses of
$617 or 13.9%. Utility expenses increased primarily due to
higher electricity rates at certain properties in the
Company’s Texas markets and generally higher rates for all
utilities in the second half of 2005. Repairs and maintenance
expenses increased primarily due to increased exterior painting
costs of $1,165 between periods. The increase in ground rent
expense of $1,286 reflects the impact of straight-lining
long-term ground lease payments associated with leases with
stated rent escalations (the straight-lining of ground rents
resulted in $1,251 of the increase) in 2005. The decrease in
property tax expenses in 2005 reflected reduced tax expense from
favorable tax valuations from taxing authorities in 2005 and
from prior year tax settlements recorded in 2005. Insurance
expenses declined in 2005 due primarily to favorable loss
experience on the Company’s property insurance program.
39
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
Discontinued
Operations
In accordance with SFAS No. 144, the operating results
and gains and losses on sales of real estate assets designated
as held for sale are included in discontinued operations in the
consolidated statements of operations. Under
SFAS No. 144, the operating results of assets
designated as held for sale are included in discontinued
operations in the consolidated statements of operations for all
periods presented. Additionally, all gains and losses on the
sale of these assets are included in discontinued operations.
For the year ended December 31, 2006, income from
discontinued operations included the results of operations of
one condominium conversion community and one apartment community
classified as held for sale at December 31, 2006 as well as
the operations of three communities sold in 2006 through their
sale dates. For the years ended December 31, 2005 and 2004,
income from discontinued operations included the results of
operations of operations of the condominium conversion community
and the apartment community classified as held for sale at
December 31, 2006, the three communities sold in 2006, one
condominium conversion community through its sell-out date in
2005 and the results of operations of 14 apartment communities
designated as held for sale and sold in 2005 and 2004 through
their sale dates.
The revenues and expenses of these communities for the years
ended December 31, 2006, 2005 and 2004 were as follows:
The decrease in revenues and expenses between years results from
the Company’s continuing asset sales program and the impact
of the continued reclassification of the operating results
relating to the aggregate number of communities held for sale
and sold during the periods presented. Likewise, the gains on
sales of operating communities and for-sale condominiums
included in discontinued operations for each year fluctuate with
the timing and size of communities and condominium homes sold.
In 2006, the Company sold 23 condominiums at discontinued
conversion communities compared to 237 in 2005. These reduced
condominium sales resulted in reduced condominium gains of
$16,587 between periods. These decreases in 2006 primarily
reflect the complete sell-out of one conversion community in the
third quarter of 2005. A discussion of the gains on operating
communities and for-sale condominium sales for the years
presented is included under the caption “Results of
Operations.”
As discussed under “Liquidity and Capital Resources,”
the Company expects to continue to sell real estate assets and
possibly convert certain apartment communities into for-sale
condominiums in future periods as part of its overall
investment, disposition and acquisition strategy depending upon
market conditions. As such, the Company may continue to have
additional assets classified as held for sale; however, the
timing and amount of such asset sales and their impact on the
aggregate revenues and expenses included in discontinued
operations will vary from year to year.
In 2004, the Company recorded asset impairment charges totaling
$2,233 to write-down the cost of two apartment communities,
located in Dallas, Texas, to their estimated fair value when the
assets were classified as held for sale or sold. Additionally,
should the Company change its expectations regarding the holding
period for certain assets or decide to classify certain assets
as held for sale, this could cause the Company to recognize
impairment losses in future periods if the carrying value of
these assets is not deemed recoverable.
40
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
The loss on early extinguishment of indebtedness included in
discontinued operations in 2006 of $495 ($486 net of
minority interest) represents the write-off of unamortized
deferred financing costs and the loss due to the ineffectiveness
of an interest rate cap derivative arrangement associated with
asset sales. In August 2006, a $40,000 secured note was assumed
by the purchaser in conjunction with the sale of an operating
community. In December 2006, the Company retired $18,600 of the
Company’s tax-exempt secured notes in conjunction with the
sale of an operating community. In 2005, the Company recorded
losses on the early extinguishment of debt of $3,220
($3,043 net of minority interest) due to the write-off of
deferred loan costs of $2,264 ($2,141 net of minority
interest) relating to the assumption of $81,560 of tax-exempt
mortgage indebtedness upon the sale of three communities. The
Company also realized a $955 ($902 net of minority
interest) loss in connection with the termination of related
interest rate cap agreements that were used as cash flow hedges
of the assumed debt.
The Company’s outlook for 2007 is based on the expectation
that apartment market fundamentals will continue to be favorable
throughout the year as a result of favorable demand stemming
from ongoing job growth and continued strength in the overall
U.S. economy, generally higher mortgage interest rates and
single-family housing prices which have decreased the
affordability of housing, and the expectation of a relatively
moderate level of supply of new market-rate apartments in the
primary markets and submarkets where the Company operates.
Rental and other revenues from fully stabilized communities are
expected to increase compared to 2006, primarily driven by
expected rental rate increases in excess of 6.0%. However,
operating expenses of fully stabilized communities are also
expected to increase in excess of 6.5% in 2007. The Company
expects the primary drivers of this expense increase will be
property taxes and insurance expenses. Insurance expenses are
expected to increase significantly primarily as a result of the
increased costs of catastrophic insurance coverage in coastal
regions. Based on these assumptions for 2007, management expects
stabilized community net operating income to increase in excess
of 5.0% in 2007.
In 2007, management currently expects to sell one apartment
community located in Atlanta, GA. This sale is expected to close
in the first half of 2007 and is expected to generate accounting
gains in 2007. The expected net proceeds from this sale are
intended to be used for various corporate purposes, including
funding of the Company’s development pipeline and
repayments of debt maturing in 2007. Additionally, the Company,
through a taxable REIT subsidiary, expects to continue the sale
of condominium homes in its condominium conversion projects that
commenced sales in 2006 and to begin sales of condominium homes
at two newly developed condominium communities that will
complete homes in 2007. The Company expects to realize net
accounting gains in 2007 from these condominium sales. Net
condominium profits are expected to be higher in 2007 due
primarily to the expected volume of condominium sales at the
Company’s newly developed, The Condominiums at Carlyle
Squaretm
project in Alexandria, VA.
Management expects interest expense in 2007 to be lower than in
2006 due generally to increased interest capitalization in 2007
resulting from increased project development volume as well as
lower fixed interest rates on unsecured debt that was refinanced
at a lower rate in 2006. Management also expects increases in
excess of 6.8% in general and administrative, investment and
development and property management expenses due in large part
to increased costs of personnel and incentive compensation plans
as well as increased technology expenses supporting the
Company’s new technology platforms and initiatives.
The Company has five projects and one expansion under
construction with a total expected cost of approximately
$257,000 and expects to begin additional development projects in
2007. As a result of expected additional development starts in
2007, the Company expects to have increased capitalization of
incremental development personnel and associated costs and, as a
result, somewhat lower expensed investment and development
expenses. The Company is also expecting
lease-up
deficits from two communities in
lease-up in
2007.
Lease-up
deficits will occur throughout 2007 as the two communities seek
to attain stabilized occupancy.
For the first quarter of 2007, management expects to report
lower net income compared to the fourth quarter of 2006. The
reduction in net income in the first quarter is expected to be
driven by reduced gains on sales of apartment communities due to
the timing of asset sales, reduced net operating income on same
store communities, reduced net operating income from
lease-up
deficits at
lease-up
communities and lower condominium profits due to the timing of
unit sales and the availability of new condominium homes later
in 2007. Management expects same store property net operating
income to be lower when compared to the fourth quarter of 2006,
primarily driven by higher projected operating expenses, due
partly to resetting annual accruals for property taxes and
higher utilities and insurance expenses. Same store operating
revenues are expected to be up slightly compared to the fourth
quarter of 2006. General and administrative and other overhead
expenses are expected to be moderately higher compared to the
fourth quarter of 2006 for the reasons discussed above.
41
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
The discussion in this Liquidity and Capital Resources section
is the same for the Company and the Operating Partnership,
except that all indebtedness described herein has been incurred
by the Operating Partnership.
The Company’s net cash flow from operating activities
increased from $86,761 in 2005 to $94,326 in 2006 primarily due
to the improved operating performance of the Company’s
stabilized communities and reduced interest expense resulting
from increased capitalization to development communities in
2006. The Company’s net cash provided by operating
activities increased from $79,105 in 2004 to $86,761 in 2005
primarily due to higher net income (before depreciation and
gains on property sales) resulting primarily from the lack of
large expenses in 2005 related to early debt extinguishment
costs and terminations of a debt remarketing agreement (an
aggregate reduction from 2004 of $13,496) and to a lesser extent
the improved operating performance of the Company. The Company
expects cash flows from operating activities to be consistent
with or improve somewhat in 2007 primarily driven by the
expected improved operating performance of the Company’s
fully stabilized properties offset somewhat by the continued
dilutive cash flow impact from asset and condominium conversion
sales and modest increases in overhead expenses.
Net cash flows from investing activities changed from $70,293
provided by investing activities in 2005 to $104,464 used in
investing activities in 2006 primarily due to increased
development, apartment acquisition and land acquisition costs in
2006. The Company acquired four apartment communities in 2006
for aggregate net proceeds of approximately $113,324, and also
acquired additional development land of approximately $50,000 in
2006. In addition, the Company incurred approximately $11,313 of
capital improvements relating to the renovations of two of its
apartment communities and construction and development
expenditures have increased in 2006 as the Company initiated new
development starts. Net cash provided by investing activities
decreased from $131,873 in 2004 to $70,293 in 2005 primarily due
to the net repayment in 2004 of loan advances to unconsolidated
entities. In 2005, the Company acquired additional land for
future development, acquired one apartment community and
continued the construction of one community in
Washington, D.C., however, the increased use of funds was
generally offset by increased proceeds from community and
condominium conversion sales. In 2007, the Company expects to
increase development activities (additional starts in 2007 and
higher expenditures at existing developments) in all of its
regional geographic areas primarily financed through debt
borrowings and, potentially, through joint venture arrangements
(see below). The Company also expects to sell one community and
additional condominium homes and to principally reinvest the
proceeds in its development communities and to repay debt.
Net cash flows from financing activities changed from net cash
used of $150,767 in 2005 to net cash provided by financing
activities of $7,391 in 2006 primarily due to higher net
borrowings to fund increasing development and acquisition
activities and increased equity proceeds from stock option
exercises in 2006 resulting from the Company’s increased
stock price between periods. Net cash used in financing
activities decreased from $212,189 in 2004 to $150,767 in 2005
primarily due to having less net proceeds from investing
activities to retire outstanding debt. In 2007, the Company
expects that its outstanding debt may increase modestly,
depending on the level of potential asset sales and other joint
venture activity, principally to fund the expected increase in
development activity discussed above.
Since 1993, the Company has elected to be taxed as a real estate
investment trust (“REIT”) under the Internal Revenue
Code of 1986, as amended (the “Code”). Management
currently intends to continue operating the Company as a REIT in
2007. As a REIT, the Company is subject to a number of
organizational and operating requirements, including a
requirement to distribute 90% of its adjusted taxable income to
its shareholders. As a REIT, the Company generally will not be
subject to federal income taxes on its taxable income it
distributes to its shareholders.
Generally, the Company’s objective is to meet its
short-term liquidity requirement of funding the payment of its
current level of quarterly preferred and common stock dividends
to shareholders through its net cash flows provided by operating
activities, less its annual recurring and periodically recurring
property and corporate capital expenditures. These operating
capital expenditures are the capital expenditures necessary to
maintain the earnings capacity of the Company’s operating
assets over time.
For the year ended December 31, 2006, the Company’s
net cash flow from operations, reduced by annual operating
capital expenditures, was not sufficient to fully fund the
Company’s current level of dividend payments to common and
preferred shareholders by approximately $12,000. The Company
used a combination of proceeds from asset sales and line of
credit borrowings to fund the additional cash flow necessary to
fully fund the Company’s annual dividend to common
shareholders of $1.80 per share. The Company’s net
cash flow from operations continues to be sufficient to meet the
dividend requirements necessary to maintain its REIT status
under the Code.
For 2007, management of the Company expects to maintain its
current quarterly dividend payment rate to common shareholders
of $0.45 per share. At this dividend rate, the Company
expects that net cash flows from operations reduced
42
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
by annual operating capital expenditures will not be sufficient
to fund the dividend payments to common and preferred
shareholders by approximately $10,000 to $15,000. The Company
intends to use primarily the proceeds from 2007 apartment
community and condominium sales to fund the additional cash flow
necessary to fully fund the dividend payments to common
shareholders. The primary factors leading to the shortfall are
the negative cash flow impact of sales of operating properties
(discussed below), the short-term negative impact of apartment
rehabilitation and
lease-up
activities and the negative impact of condominium conversion
properties prior to the reinvestment of such proceeds. The
Company’s board of directors reviews the dividend
quarterly, and there can be no assurance that the current
dividend level will be maintained.
The Company generally expects to utilize net cash flow from
operations, available cash and cash equivalents and available
capacity under its revolving lines of credit to fund its
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 its debt
service requirements. Available borrowing capacity under the
Company’s revolving lines of credit as of December 31,
2006 was created primarily through the Company’s asset
sales program. The Company generally expects to fund its
long-term liquidity requirements, including maturities of
long-term debt and acquisition and development activities,
through long-term unsecured and secured borrowings, through
additional sales of selected operating and condominium
conversion properties, and possibly through equity or leveraged
joint venture arrangements. The Company may also continue to use
joint venture arrangements in future periods to reduce its
market concentrations in certain markets, build critical mass in
other markets and to reduce its exposure to certain risks of its
future development activities.
As previously discussed, the Company intends to use the proceeds
from the sale of operating communities and condominium homes,
availability under its unsecured revolving lines of credit, debt
financing and joint venture arrangements as the primary source
of capital to fund its current and future development and
acquisition expenditures. The Company had instituted an active
asset sale and capital recycling program as the primary means to
fund its on-going community development and acquisition program.
Total net sales proceeds from operating community, condominium
and land sales in 2006, 2005 and 2004 were $216,419 (including
$40,000 debt assumed), $281,106 (including $81,560 of debt
assumed) and $242,962 (including $104,325 of debt assumed),
respectively.
In 2006, the Company sold three apartment communities,
containing 1,340 units, as part of its asset sales program
designed to maintain the low average age and high quality of the
portfolio, to reduce the Company’s market concentration in
Atlanta, Georgia and to exit the Denver, Colorado market. These
sales generated significant capital gains for tax purposes in
2006. The Company was able to use its regular quarterly dividend
of $0.45 per share to distribute these capital gains to
shareholders. The Company plans to sell at least one apartment
community in 2007 classified as held for sale at
December 31, 2006. This sale is expected to generate net
proceeds in excess of $20,000. The Company also expects to
generate additional sales proceeds from the sale of converted
condominium homes as well as from the sale of newly developed
condominium homes. It is the current intent of management to
continue to recycle capital through selling assets and
reinvesting the proceeds as a strategy to diversify the cash
flows of the Company across its markets and focus on building
critical mass in fewer markets.
The Company used borrowings under its lines of credit and the
proceeds from $150,000 of unsecured notes to retire
approximately $75,000 of maturing unsecured notes and to repay
approximately $64,000 of secured debt. In 2007, the Company has
approximately $109,000 of unsecured and secured debt that
matures. The Company anticipates refinancing some or all of this
debt using its unsecured revolving lines of credit or through
new unsecured or secured debt issuances, depending on the amount
and timing of the Company’s capital needs and general
credit market conditions.
At December 31, 2006, the Company had approximately
$108,913 borrowed under its $480,000 combined line of credit
facilities. The credit facilities mature in April 2010. The
terms, conditions and restrictive covenants associated with the
Company’s lines of credit facilities are summarized in
note 4 to the consolidated financial statements. At
December 31, 2006, management believed the Company was in
compliance with the covenants of the Company’s credit
facility arrangements. Management believes it will have adequate
capacity under its facilities to execute its 2007 business plan
and meet its short-term liquidity requirements.
43
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
A summary of the Company’s future contractual obligations
related to long-term debt, non-cancelable operating leases and
other obligations at December 31, 2006, were as follows:
In addition to these contractual obligations, the Company incurs
annual capital expenditures to maintain and enhance its existing
portfolio of operating properties. Aggregate capital
expenditures for the Company’s operating properties totaled
$17,109, $14,429 and $14,515 for the years ended
December 31, 2006, 2005 and 2004, respectively. Based on
the size of the Company’s operating property portfolio at
December 31, 2006, the Company expects that its capital
expenditures in 2007 will be modestly higher than the amount
incurred in 2006 as the Company seeks to maintain the operating
performance of its assets.
At December 31, 2006, the Company had an outstanding
interest rate swap derivative financial instrument with a
notional value of approximately $95,510 with a maturity date in
2009. The contractual payment terms of this arrangement are
summarized in Item 7A, “Quantitative and Qualitative
Disclosures About Market Risk,” in this
Form 10-K.
Additional information regarding the accounting and disclosure
of this arrangement is included in note 13 to the
Company’s consolidated financial statements.
The Company holds investments in three unconsolidated entities,
in which it has a 35% ownership interest. Two of these
unconsolidated entities have third-party mortgage indebtedness
and the aggregate indebtedness totaled $66,998 at
December 31, 2006.
A summary of the Company’s outstanding debt and debt
maturities at December 31, 2006 is included in note 4
to the consolidated financial statements. A summary of changes
in secured and unsecured debt in 2006 is discussed below.
Upon their maturity in March 2006, the Company repaid $50,000 of
6.71% senior unsecured notes. In October 2006, the Company
repaid $25,000 of 7.5% senior unsecured notes. Both notes
were repaid from available borrowings under its unsecured lines
of credit.
In April 2006, the Company closed a $40,000 mortgage note
payable secured by an apartment community located in Denver,
Colorado. The mortgage note accrued interest at LIBOR plus 1.0%,
was scheduled to mature in April 2008 and was pre-payable
without penalty. In August 2006, this mortgage note was assumed
by the purchaser of this community.
In June 2006, the Company issued $150,000 of senior unsecured
notes. The notes bear interest at 6.30% and mature in September
2013. The net proceeds from the unsecured notes were used to
reduce amounts outstanding under the Company’s unsecured
lines of credit.
In July 2006, in conjunction with an apartment community
acquisition (see note 4 to the consolidated financial
statements), the Company assumed a secured, fixed rate mortgage
note payable with an outstanding balance of $41,394. The
mortgage note bears interest at a coupon rate of approximately
6.1%, requires monthly principal and interest payments and
matures in November 2011.
44
Post Properties, Inc.
Post Apartment Homes, L.P.
Table of Contents
In December 2006, the Company repaid a $45,718, 6.8% secured
mortgage note prior to its schedule maturity date in 2007. Also
in December 2006, the Company repaid $18,600 of tax-exempt
indebtedness associated with the sale of an apartment community.
In late 2006, the Company’s board of directors adopted a
new stock repurchase program under which the Company may
repurchase up to $200,000 of common or preferred stock at market
prices from time to time until December 31, 2008. The
Company has in place a 10b5-1 stock purchase plan which expires
in February 2007.
Under its previous stock repurchase program which expired on
December 31, 2006, the Company repurchased approximately
$5,000 and $34,400 of common stock in 2006 and 2005,
respectively. Subsequent to December 31, 2006, the Company
repurchased approximately $3,694 of common stock.
The Company has a policy of capitalizing those expenditures
relating to the acquisition of new assets and the development
and construction of new apartment communities. In addition, the
Company capitalizes expenditures that enhance the value of
existing assets and expenditures that substantially extend the
life of existing assets. All other expenditures necessary to
maintain a community in ordinary operating condition are
expensed as incurred. Additionally, for new development
communities, carpet, vinyl and blind replacements are expensed
as incurred during the first five years (which corresponds to
the estimated depreciable life of these assets) after
construction completion. Thereafter, these replacements are
capitalized. Further, the Company expenses as incurred interior
and exterior painting of operating communities, unless those
communities are under rehabilitation.
The Company capitalizes interest, real estate taxes, and certain
internal personnel and associated costs related to apartment
communities under development, construction and rehabilitation.
The incremental personnel and associated costs are capitalized
to the projects under development and rehabilitation based upon
the effort associated with such projects. The Company treats
each unit in an apartment community separately for cost
accumulation, capitalization and expense recognition purposes.
Prior to the commencement of leasing activities, interest and
other construction costs are capitalized and included in
construction in progress. The Company ceases the capitalization
of such costs as the residential units in a community become
substantially complete and available for occupancy. This
practice results in a proration of these costs between amounts
that are capitalized and expensed as the residential units in a
development community become available for occupancy. In
addition, prior to the completion of units, the Company
expenses, as incurred, substantially all operating expenses
(including pre-opening marketing expenses) of such communities.
Acquisition of assets and community improvement and other
capitalized expenditures for the years ended December 31,
2006, 2005 and 2004 are summarized as follows:
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||