FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file numbers 1-12080 and 0-28226
POST PROPERTIES, INC.
POST APARTMENT HOMES, L.P.
(Exact name of registrant as specified in its charter)
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Georgia
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58-1550675 |
Georgia
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58-2053632 |
(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.) |
4401 Northside Parkway, Suite 800, Atlanta, Georgia 30327
(Address of principal executive offices zip code)
(404) 846-5000
(Registrants telephone number, including area code)
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 registrant was required to file such reports), and (2) have been
subject to such filing requirements for the past 90 days.
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Post Properties, Inc.
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Yes
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þ
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No
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Post Apartment Homes, L.P.
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Yes
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þ
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No
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Indicate by check mark whether the registrants are large accelerated filers, accelerated filers,
non-accelerated filers or smaller reporting company.
See definition of accelerated filer, large accelerated filer and smaller reporting company in Rule
12b-2 of the Exchange Act.
Post Properties, Inc.
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Large accelerated filer þ
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting
companyo
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(Do not check if a smaller reporting company) |
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Post Apartment Homes, L.P.
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
þ
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Smaller reporting
companyo
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the
Exchange Act).
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Post Properties, Inc.
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Yes
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o
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No
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þ |
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Post Apartment Homes, L.P.
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Yes
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o
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No
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þ |
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the
latest practicable date:
44,184,986 shares of common stock outstanding as of October 31, 2008.
POST PROPERTIES, INC.
POST APARTMENT HOMES, L.P.
INDEX
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Page |
Part I FINANCIAL INFORMATION |
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Item 1 Financial Statements |
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1 |
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2 |
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3 |
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4 |
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5 |
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21 |
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22 |
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23 |
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24 |
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25 |
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41 |
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64 |
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64 |
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65 |
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65 |
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66 |
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66 |
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66 |
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66 |
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66 |
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67 |
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68 |
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70 |
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EX-31.1 |
EX-31.2 |
EX-32.1 |
EX-32.2 |
POST PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
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September 30, |
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December 31, |
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2008 |
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2007 |
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(Unaudited) |
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Assets |
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Real estate assets |
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Land |
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$ |
235,757 |
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$ |
276,680 |
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Building and improvements |
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1,677,522 |
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1,840,563 |
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Furniture, fixtures and equipment |
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195,929 |
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204,433 |
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Construction in progress |
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139,154 |
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134,125 |
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Land held for future development |
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123,902 |
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154,617 |
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2,372,264 |
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2,610,418 |
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Less: accumulated depreciation |
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(514,029 |
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(562,226 |
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For-sale condominiums |
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20,167 |
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38,844 |
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Assets held for sale, net of accumulated depreciation of $86,383 and
$4,031 at September 30, 2008 and December 31, 2007, respectively |
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244,659 |
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24,576 |
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Total real estate assets |
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2,123,061 |
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2,111,612 |
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Investments in and advances to unconsolidated real estate entities |
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40,874 |
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23,036 |
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Cash and cash equivalents |
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4,343 |
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11,557 |
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Restricted cash |
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11,716 |
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5,642 |
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Deferred charges, net |
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9,489 |
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10,538 |
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Other assets |
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38,649 |
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105,756 |
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Total assets |
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$ |
2,228,132 |
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$ |
2,268,141 |
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Liabilities and shareholders equity |
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Indebtedness, including $62,908 and $0 secured by assets held
for sale as of September 30, 2008 and December 31, 2007, respectively |
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$ |
1,043,418 |
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$ |
1,059,066 |
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Accounts payable and accrued expenses |
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110,581 |
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100,215 |
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Dividend and distribution payable |
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19,990 |
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19,933 |
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Accrued interest payable |
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13,474 |
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4,388 |
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Security deposits and prepaid rents |
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16,903 |
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11,708 |
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Total liabilities |
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1,204,366 |
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1,195,310 |
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Minority interest of common unitholders in Operating Partnership |
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6,034 |
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10,354 |
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Minority interests in consolidated real estate entities |
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9,542 |
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3,972 |
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Total minority interests |
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15,576 |
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14,326 |
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Commitments and contingencies |
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Shareholders equity |
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Preferred stock, $.01 par value, 20,000 authorized: |
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8 1/2% Series A Cumulative Redeemable Shares, liquidation preference
$50 per share, 900 shares issued and outstanding |
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9 |
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9 |
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7 5/8% Series B Cumulative Redeemable Shares, liquidation preference
$25 per share, 2,000 shares issued and outstanding |
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20 |
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20 |
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Common stock, $.01 par value, 100,000 authorized: |
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44,131 and 43,825 shares issued, 44,129 and 43,825 shares outstanding
at September 30, 2008 and December 31, 2007, respectively |
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441 |
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438 |
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Additional paid-in-capital |
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884,331 |
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874,928 |
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Accumulated earnings |
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129,405 |
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189,985 |
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Accumulated other comprehensive income (loss) |
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(2,601 |
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(3,962 |
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1,011,605 |
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1,061,418 |
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Less common stock in treasury, at cost, 87 and 72 shares
at September 30, 2008 and December 31, 2007, respectively |
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(3,415 |
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(2,913 |
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Total shareholders equity |
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1,008,190 |
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1,058,505 |
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Total liabilities and shareholders equity |
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$ |
2,228,132 |
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$ |
2,268,141 |
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The accompanying notes are an integral part of these consolidated financial statements.
-1-
POST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenues |
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Rental |
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$ |
63,700 |
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$ |
62,460 |
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$ |
188,174 |
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$ |
183,998 |
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Other property revenues |
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3,882 |
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3,779 |
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11,263 |
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10,829 |
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Other |
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261 |
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171 |
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735 |
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416 |
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Total revenues |
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67,843 |
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66,410 |
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200,172 |
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195,243 |
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Expenses |
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Total property operating and maintenance (exclusive of items
shown separately below) |
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32,545 |
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32,169 |
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98,557 |
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95,785 |
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Depreciation |
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14,979 |
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14,522 |
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43,628 |
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43,248 |
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General and administrative |
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4,461 |
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4,761 |
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15,265 |
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16,168 |
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Investment, development and other |
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1,834 |
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2,007 |
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4,648 |
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5,512 |
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Strategic review costs |
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8,161 |
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Impairment, severance and other costs |
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5,002 |
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34,302 |
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Total expenses |
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58,821 |
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53,459 |
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204,561 |
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160,713 |
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Operating income (loss) |
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9,022 |
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12,951 |
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(4,389 |
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34,530 |
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Interest income |
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96 |
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189 |
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367 |
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652 |
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Interest expense |
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(11,471 |
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(10,658 |
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(31,739 |
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(32,566 |
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Amortization of deferred financing costs |
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(869 |
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(828 |
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(2,579 |
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(2,469 |
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Gains on sales of real estate assets, net |
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476 |
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5,061 |
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2,227 |
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71,506 |
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Equity in income of unconsolidated real estate entities |
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260 |
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402 |
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1,081 |
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1,216 |
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Other income (expense), net |
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534 |
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(262 |
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426 |
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(784 |
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Minority interest in consolidated property partnerships |
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52 |
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(452 |
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113 |
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(1,146 |
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Minority interest of common unitholders |
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14 |
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(41 |
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298 |
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(923 |
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Income (loss) from continuing operations |
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(1,886 |
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6,362 |
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(34,195 |
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70,016 |
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Discontinued operations |
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Income from discontinued property operations, net of
minority interest |
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5,612 |
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4,380 |
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13,254 |
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12,244 |
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Gains on sales of real estate assets, net of minority interest |
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23,350 |
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307 |
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25,640 |
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17,197 |
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Income from discontinued operations |
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28,962 |
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4,687 |
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38,894 |
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29,441 |
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Net income |
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27,076 |
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11,049 |
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4,699 |
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99,457 |
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Dividends to preferred shareholders |
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(1,909 |
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(1,909 |
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(5,728 |
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(5,728 |
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Net income (loss) available to common shareholders |
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$ |
25,167 |
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$ |
9,140 |
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$ |
(1,029 |
) |
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$ |
93,729 |
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Per common share data Basic |
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Income (loss) from continuing operations
(net of preferred dividends) |
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$ |
(0.09 |
) |
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$ |
0.10 |
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$ |
(0.91 |
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$ |
1.48 |
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Income from discontinued operations |
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0.66 |
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0.11 |
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0.88 |
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0.68 |
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Net income (loss) available to common shareholders |
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$ |
0.57 |
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$ |
0.21 |
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$ |
(0.02 |
) |
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$ |
2.16 |
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Weighted average common shares outstanding basic |
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44,047 |
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43,524 |
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43,976 |
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43,452 |
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Per common share data Diluted |
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Income (loss) from continuing operations
(net of preferred dividends) |
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$ |
(0.09 |
) |
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$ |
0.10 |
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$ |
(0.91 |
) |
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$ |
1.46 |
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Income from discontinued operations |
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0.66 |
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$ |
0.11 |
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0.88 |
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0.67 |
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Net income (loss) available to common shareholders |
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$ |
0.57 |
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$ |
0.21 |
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$ |
(0.02 |
) |
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$ |
2.12 |
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Weighted average common shares outstanding diluted |
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44,047 |
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44,101 |
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43,976 |
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44,166 |
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The accompanying notes are an integral part of these consolidated financial statements.
-2-
POST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND
ACCUMULATED EARNINGS
(In thousands, except per share data)
(Unaudited)
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Accumulated |
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Additional |
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Other |
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|
|
|
Preferred |
|
|
Common |
|
|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Treasury |
|
|
|
|
|
|
Stock |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Stock |
|
|
Total |
|
Shareholders Equity and Accumulated
Earnings, December 31, 2007 |
|
$ |
29 |
|
|
$ |
438 |
|
|
$ |
874,928 |
|
|
$ |
189,985 |
|
|
$ |
(3,962 |
) |
|
$ |
(2,913 |
) |
|
$ |
1,058,505 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,699 |
|
|
|
|
|
|
|
|
|
|
|
4,699 |
|
Net change in derivatives, net of minority
interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,376 |
|
|
|
|
|
|
|
1,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,075 |
|
Proceeds from employee stock purchase, stock
option and other plans |
|
|
|
|
|
|
1 |
|
|
|
2,402 |
|
|
|
|
|
|
|
|
|
|
|
(984 |
) |
|
|
1,419 |
|
Adjustment for minority interest of
unitholders
in Operating Partnership upon conversion
of
units into common shares and at dates of
capital transactions |
|
|
|
|
|
|
2 |
|
|
|
3,478 |
|
|
|
|
|
|
|
(15 |
) |
|
|
482 |
|
|
|
3,947 |
|
Stock-based compensation, net of
minority interest |
|
|
|
|
|
|
|
|
|
|
3,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,523 |
|
Dividends to preferred shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,728 |
) |
|
|
|
|
|
|
|
|
|
|
(5,728 |
) |
Dividends to common shareholders
($1.35 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59,551 |
) |
|
|
|
|
|
|
|
|
|
|
(59,551 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity and Accumulated
Earnings, September 30, 2008 |
|
$ |
29 |
|
|
$ |
441 |
|
|
$ |
884,331 |
|
|
$ |
129,405 |
|
|
$ |
(2,601 |
) |
|
$ |
(3,415 |
) |
|
$ |
1,008,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-3-
POST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,699 |
|
|
$ |
99,457 |
|
Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
47,251 |
|
|
|
50,889 |
|
Amortization of deferred financing costs |
|
|
2,579 |
|
|
|
2,469 |
|
Minority interest of common unitholders in Operating Partnership |
|
|
(298 |
) |
|
|
923 |
|
Minority interest in discontinued operations |
|
|
290 |
|
|
|
446 |
|
Minority interest in consolidated entities |
|
|
362 |
|
|
|
1,416 |
|
Gains on sales of real estate assets |
|
|
(28,059 |
) |
|
|
(88,969 |
) |
Other expense |
|
|
689 |
|
|
|
842 |
|
Asset impairment charges |
|
|
28,947 |
|
|
|
|
|
Equity in income of unconsolidated entities |
|
|
(1,081 |
) |
|
|
(1,216 |
) |
Distributions of earnings of unconsolidated entities |
|
|
2,059 |
|
|
|
1,838 |
|
Deferred compensation |
|
|
552 |
|
|
|
394 |
|
Stock-based compensation |
|
|
3,549 |
|
|
|
3,072 |
|
Changes in assets, increase in: |
|
|
|
|
|
|
|
|
Other assets |
|
|
(2,219 |
) |
|
|
(3,891 |
) |
Deferred charges |
|
|
(182 |
) |
|
|
(139 |
) |
Changes in liabilities, increase (decrease) in: |
|
|
|
|
|
|
|
|
Accrued interest payable |
|
|
9,086 |
|
|
|
7,882 |
|
Accounts payable and accrued expenses |
|
|
11,973 |
|
|
|
2,141 |
|
Security deposits and prepaid rents |
|
|
(879 |
) |
|
|
660 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
79,318 |
|
|
|
78,214 |
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|
Construction and acquisition of real estate assets, net of payables |
|
|
(104,972 |
) |
|
|
(227,402 |
) |
Net proceeds from sales of real estate assets |
|
|
151,661 |
|
|
|
182,231 |
|
Capitalized interest |
|
|
(9,546 |
) |
|
|
(8,659 |
) |
Annually recurring capital expenditures |
|
|
(8,592 |
) |
|
|
(8,815 |
) |
Periodically recurring capital expenditures |
|
|
(5,114 |
) |
|
|
(5,623 |
) |
Community rehabilitation and other revenue generating capital expenditures |
|
|
(12,554 |
) |
|
|
(10,646 |
) |
Corporate additions and improvements |
|
|
(613 |
) |
|
|
(1,932 |
) |
Distributions from (investments in and advances to) unconsolidated entities |
|
|
(11,727 |
) |
|
|
25,788 |
|
Note receivable collections and other investments |
|
|
1,624 |
|
|
|
837 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
167 |
|
|
|
(54,221 |
) |
|
|
|
|
|
|
|
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
Lines of credit proceeds (repayments), net |
|
|
(131,393 |
) |
|
|
149,734 |
|
Proceeds from indebtedness |
|
|
120,000 |
|
|
|
|
|
Payments on indebtedness |
|
|
(3,865 |
) |
|
|
(112,159 |
) |
Payments of financing costs and other |
|
|
(5,052 |
) |
|
|
(257 |
) |
Treasury stock acquisitions |
|
|
|
|
|
|
(3,694 |
) |
Proceeds from employee stock purchase and stock options plans |
|
|
867 |
|
|
|
4,470 |
|
Capital contributions (distributions) of minority interests |
|
|
(1,631 |
) |
|
|
429 |
|
Distributions to common unitholders |
|
|
(483 |
) |
|
|
(882 |
) |
Dividends paid to preferred shareholders |
|
|
(5,728 |
) |
|
|
(3,819 |
) |
Dividends paid to common shareholders |
|
|
(59,414 |
) |
|
|
(58,835 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(86,699 |
) |
|
|
(25,013 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
(7,214 |
) |
|
|
(1,020 |
) |
Cash and cash equivalents, beginning of period |
|
|
11,557 |
|
|
|
3,663 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
4,343 |
|
|
$ |
2,643 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-4-
POST PROPERTIES. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
1. |
|
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES |
|
|
|
Organization |
|
|
|
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 September 30, 2008, the Company owned 21,890 apartment
units in 60 apartment communities, including 1,747 apartment units in five communities held in
unconsolidated entities and 1,736 apartment units in five communities currently under
construction and/or in lease-up. The Company is also developing and selling 506 for-sale
condominium homes in four communities (including 129 units in one community held in an
unconsolidated entity) and is converting apartment homes in two communities initially consisting
of 349 units into for-sale condominium homes through a taxable REIT subsidiary. At September
30, 2008, approximately 40.9%, 20.3%, 12.1% and 10.1% (on a unit basis) of the Companys
operating communities were located in the Atlanta, Dallas, the greater Washington D.C. and Tampa
metropolitan areas, respectively. |
|
|
|
The Company has elected to qualify and operate as a self-administrated and self-managed real
estate investment trust (REIT) for federal income tax purposes. A REIT is a legal entity
which holds real estate interests and is generally not subject to federal income tax on the
income it distributes to its shareholders. |
|
|
|
At September 30, 2008, the Company had outstanding 44,129 shares of common stock and owned the
same number of units of common limited partnership interests (Common Units) in the Operating
Partnership, representing a 99.3% common ownership interest in the Operating Partnership. Common
Units held by persons other than the Company totaled 293 at September 30, 2008 and represented a
0.7% common minority interest in the Operating Partnership. Each Common Unit may be redeemed by
the holder thereof for either one share of Company common stock or cash equal to the fair market
value thereof at the time of redemption, at the option of the Company. The Companys weighted
average common ownership interest in the Operating Partnership was 99.3% and 98.6% for the three
months ended and 99.3% and 98.6% for the nine months ended September 30, 2008 and 2007,
respectively. |
|
|
|
Conclusion of Strategic Process |
|
|
|
On January 23, 2008, the Company announced that its Board of Directors had authorized
management, working with financial and legal advisors, to initiate a formal process to pursue a
possible business combination or other sale transaction and to seek proposals from potentially
interested parties. The Board ended the process on June 25, 2008 due to the increasingly
difficult market environment and a lack of definitive proposals. For the nine months ended
September 30, 2008, the Company incurred approximately $8,161 of strategic review costs related
to this process. |
|
|
|
Basis of Presentation |
|
|
|
The accompanying unaudited financial statements have been prepared by the Companys management
in accordance with generally accepted accounting principles for interim financial information
and applicable rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and disclosures required by generally accepted
accounting principles for complete financial statements. In the opinion of management, all
adjustments (consisting only of normally recurring adjustments) considered necessary for a fair
presentation have been included. The results of operations for the three and nine months ended
September 30, 2008 are not necessarily indicative of the results that may be expected for the
full year. These financial statements should be read in conjunction with the Companys audited
financial statements and notes thereto included in its Annual Report on Form 10-K, as amended,
for the year ended December 31, 2007 (the Form 10-K). |
|
|
|
The accompanying consolidated financial statements include the consolidated accounts of the
Company, the Operating Partnership and their wholly owned subsidiaries. The Company also
consolidates other entities in which it has a controlling financial interest or entities where
it is determined to be the primary beneficiary under Financial Accounting Standards Board
Interpretation No. 46R (FIN 46R), Consolidation of Variable Interest Entities. Under FIN
46R, variable interest entities (VIEs) are generally entities that lack sufficient equity to
finance their activities without additional financial support from other parties or whose equity
holders lack adequate decision making ability. The primary beneficiary is required to
consolidate a VIE for financial reporting purposes. The application of FIN 46R requires
management to make significant estimates and judgments about the Companys and its other
partners rights, obligations and economic interests in such entities. For entities in which
the |
-5-
POST PROPERTIES. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
Company has less than a controlling financial interest or entities where it is not deemed to be
the primary beneficiary under FIN 46R, the entities are accounted for using the equity method of
accounting (under the provisions of Emerging Issues Task Force (EITF) No. 04-5). Accordingly,
the Companys share of the net earnings or losses of these entities is included in consolidated
net income. All significant inter-company accounts and transactions have been eliminated in
consolidation. The minority interest of unitholders in the operations of the Operating
Partnership is calculated based on the weighted average unit ownership during the period.
Revenue Recognition
Residential properties are leased under operating leases with terms of generally one year or
less. Rental revenues from residential leases are recognized on the straight-line method over
the approximate life of the leases, which is generally one year. The recognition of rental
revenues from residential leases when earned has historically not been materially different from
rental revenues recognized on a straight-line basis.
Under the terms of residential leases, the residents of the Companys residential communities
are obligated to reimburse the Company for certain utility usage, water and electricity (at
selected properties), where the Company is the primary obligor to the public utility entity.
These utility reimbursements from residents are reflected as other property revenues in the
consolidated statements of operations.
Sales and the associated gains or losses of real estate assets and for-sale condominiums are
recognized in accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 66, Accounting for Sales of Real Estate. For condominium conversion projects,
revenues from individual condominium unit sales are recognized upon the closing of the sale
transactions (the Completed Contract Method), as all conditions for full profit recognition
have been met at that time and the conversion construction periods are typically very short.
Under SFAS No. 66, the Company uses the relative sales value method to allocate costs and
recognize profits from condominium conversion sales. In accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets, gains on sales of condominium
units at complete community condominium conversion projects are included in discontinued
operations. For condominium conversion projects relating to a portion of an existing apartment
community, the Company also recognizes revenues and the associated gains under the Completed
Contract Method, as discussed herein. Since a portion of an operating community does not meet
the requirements of a component of an entity under SFAS No. 144, the revenues and gains on sales
of condominium units at partial condominium communities are included in continuing operations.
For newly developed condominiums, the Company accounts for each project under either the
Completed Contract Method or the Percentage of Completion Method, based on a specific
evaluation of the factors specified in SFAS No. 66 and the guidance provided by EITF 06-8. The
factors used to determine the appropriate accounting method are the legal commitment of the
purchaser in the real estate contract, whether 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 and the guidance provided by EITF 06-8. Under the Percentage of
Completion Method, revenues and the associated gains are recognized over the project
construction period generally based on the percentage of total project costs incurred to
estimated total project costs for each condominium unit under a binding real estate contract.
As of September 30, 2008, all newly developed condominium projects are accounted for under the
Completed Contract Method.
Recently Issued and Adopted Accounting Pronouncements
SFAS No. 157, Fair Value Measurements, was issued in September 2006. The Company adopted SFAS
No. 157 on January 1, 2008. 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 and
defines it as the price that would be received to sell an asset or paid to transfer a liability
in a transaction between willing market participants. Additional disclosures focusing on the
methods used to determine fair value are also required using the following hierarchy:
|
|
|
Level 1 Quoted prices in active markets for identical assets or liabilities that are
accessible at the measurement date. |
|
|
|
|
Level 2 Inputs other than quoted prices that are observable for the asset or liability,
either directly or indirectly. |
|
|
|
|
Level 3 Unobservable inputs for the assets or liability. |
-6-
POST PROPERTIES. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
The Company applies SFAS No. 157 in relation to the valuation of its derivative instrument at
fair value (see note 6) and the Companys impairment valuation analysis related to real estate
assets (see note 8). The following table presents the Companys real estate assets and
derivative liabilities reported at fair market value and the related level in the fair value
hierarchy as defined by SFAS No. 157 used to measure those assets and liabilities at September
30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements as of September 30, 2008 |
Assets (Liabilities) |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
Real estate assets, land held for development and sale |
|
$ |
44,773 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
44,773 |
|
Interest rate swap agreement |
|
|
(1,526 |
) |
|
|
|
|
|
|
(1,526 |
) |
|
|
|
|
|
|
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities including
an amendment of FASB Statement No. 115, was issued in February 2007. SFAS No. 159 gives the
Company the irrevocable option to carry most financial assets and liabilities at fair value,
with changes in fair value recognized in earnings. The Company adopted SFAS No. 159 on January
1, 2008, and the adoption did not have a material impact on the Companys financial position and
results of operations. The Company did not elect to record any of its financial assets and
liabilities at fair value in 2008 that were not recorded as such under existing accounting
pronouncements. |
|
|
|
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, was issued in
December 2007. SFAS No. 160 requires all entities to report noncontrolling (minority) interests
in subsidiaries as equity in the consolidated financial statements. SFAS No. 160 is effective
for the Company on January 1, 2009. The Company is currently evaluating the potential impact of
SFAS No. 160 on the Companys financial position and results of operations. |
|
|
|
SFAS No. 141R, Business Combinations, was issued in December 2007. SFAS No. 141R will replace
SFAS No. 141 on the date it becomes effective. SFAS No. 141R will require 1) acquirers to
recognize all of the assets acquired and liabilities assumed in a business combination at fair
value, 2) that the acquisition date be used to determine fair value for all assets acquired and
all liabilities assumed, and 3) enhanced disclosures for the acquirer surrounding the financial
effects of the business combination. The provisions of SFAS 141R will lead to the expensing of
acquisition related transaction costs and the potential recognition of acquisition related
contingencies. SFAS No. 141R is effective for the Company on January 1, 2009. The Company is
currently evaluating the potential impact of SFAS No. 141R on the Companys financial position
and results of operations. |
|
2. |
|
REAL ESTATE ACTIVITY |
|
|
|
Dispositions |
|
|
|
The Company classifies real estate assets as held for sale after the approval of its board of
directors and after the Company has commenced an active program to sell the assets. At
September 30, 2008, the Company had seven apartment communities, containing 2,365 units, and
certain parcels of land classified as held for sale. These real estate assets are reflected in
the accompanying consolidated balance sheet at $244,659, which represents the lower of their
depreciated cost or fair value less costs to sell. At September 30, 2008, the Company also had
portions of two communities being converted to condominiums and certain completed condominium
units at newly developed condominium communities totaling $20,167 classified as for-sale
condominiums on the accompanying consolidated balance sheet. |
|
|
|
For the three and nine months ended September 30, 2008 and 2007, income from continuing
operations included net gains from condominium sales activities at newly developed and
condominium conversion projects representing portions of existing communities. In addition to
the condominium gains included in continuing operations, the Company expensed certain sales and
marketing costs associated with pre-sale condominium communities and condominium communities
under development and such costs are included in condominium expenses in the table below. A
summary of revenues and costs and expenses of condominium activities included in continuing
operations for the three and nine months ended September 30, 2008 and 2007 was as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Condominium revenues |
|
$ |
8,633 |
|
|
$ |
30,501 |
|
|
$ |
26,981 |
|
|
$ |
61,592 |
|
Condominium costs and expenses |
|
|
(8,157 |
) |
|
|
(25,440 |
) |
|
|
(24,754 |
) |
|
|
(49,324 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on sales of condominiums, net |
|
$ |
476 |
|
|
$ |
5,061 |
|
|
$ |
2,227 |
|
|
$ |
12,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-7-
POST PROPERTIES. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
For the nine months ended September 30, 2007, gains on sales of real estate assets in continuing
operations also included a gain of $55,300 related to the Companys transfer of two operating
apartment communities to a newly formed unconsolidated entity in which the Company retained a
25% non-controlling interest for aggregate proceeds of approximately $89,351. The gain was
calculated as the difference between the proceeds received from the independent third party for
its 75% interest in the unconsolidated entity and the Companys 75% proportionate share of the
net book value of operating communities transferred to the unconsolidated entity. The
unconsolidated entity obtained mortgage financing secured by the apartment communities totaling
approximately $85,723, of which approximately $21,431 was distributed to the Company.
Additionally, for the nine months ended September 30, 2007, gains on sales of real estate assets
in continuing operations included gains of $3,938 on the sales of land sites in Atlanta, Georgia
and Dallas, Texas.
Under SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, the
operating results of real estate assets designated as held for sale are included in discontinued
operations in the consolidated statement of operations for all periods presented. Additionally,
all gains and losses on the sale of these assets are included in discontinued operations. For
the three and nine months ended September 30, 2008, income from discontinued operations included
the results of operations of seven apartment communities classified as held for sale at
September 30, 2008 and two apartment communities through their sale dates in 2008. For the
three and nine months ended September 30, 2007, income from discontinued operations included the
results of operations of the seven apartment communities classified as held for sale at
September 30, 2008, the two apartment communities sold in 2008, a condominium conversion
community through its sell out date in February 2007 and three apartment communities sold in
2007 through their respective sale dates.
The revenues and expenses of these communities for the three and nine months ended September 30,
2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
$ |
10,896 |
|
|
$ |
13,256 |
|
|
$ |
33,398 |
|
|
$ |
39,528 |
|
Other property revenues |
|
|
415 |
|
|
|
641 |
|
|
|
1,290 |
|
|
|
1,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
11,311 |
|
|
|
13,897 |
|
|
|
34,688 |
|
|
|
41,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property operating and maintenance (exclusive of items
shown separately below) |
|
|
3,640 |
|
|
|
4,493 |
|
|
|
11,540 |
|
|
|
13,619 |
|
Depreciation |
|
|
|
|
|
|
2,264 |
|
|
|
3,623 |
|
|
|
7,641 |
|
Interest |
|
|
1,776 |
|
|
|
2,565 |
|
|
|
5,697 |
|
|
|
7,456 |
|
Minority interest in consolidated property partnerships |
|
|
241 |
|
|
|
133 |
|
|
|
475 |
|
|
|
271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
5,657 |
|
|
|
9,455 |
|
|
|
21,335 |
|
|
|
28,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued property operations
before minority interest |
|
|
5,654 |
|
|
|
4,442 |
|
|
|
13,353 |
|
|
|
12,423 |
|
Minority interest |
|
|
(42 |
) |
|
|
(62 |
) |
|
|
(99 |
) |
|
|
(179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued property operations |
|
$ |
5,612 |
|
|
$ |
4,380 |
|
|
$ |
13,254 |
|
|
$ |
12,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2008, the Company recognized net gains in
discontinued operations of $23,520 ($23,350 net of minority interest) and $25,831 ($25,640 net
of minority interest), respectively, from the sales of two communities, containing 143 and 250
units. These sales generated net proceeds of approximately $37,846 and $57,279 for the three
and nine months ended September 30, 2008, respectively. For the nine months ended September 30,
2007, the Company recognized net gains in discontinued operations of $16,974 ($16,714 net of
minority interest) from the sale of one community, containing 182 units. The sale generated net
proceeds of $23,741.
Subsequent to September 30, 2008, the Company sold one community, containing 494 units, for
gross proceeds of approximately $52,750. As a result of this sale, the Company will record a
gain of approximately $37 million in the fourth quarter. Net proceeds from the sale were
primarily invested in cash equivalents.
-8-
POST PROPERTIES. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
For the three and nine months ended September 30, 2007, the Company recorded additional
condominium gains of $311 resulting from the reduction of unused warranty accruals from
condominium communities sold out in the prior year. For the nine months ended September 30,
2007, gains on sales of real estate assets included in discontinued operations also included net
gains from condominium sales at one condominium conversion community that sold out in February
2007. A summary of revenues and costs and expenses of condominium activities included in
discontinued operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, 2007 |
|
|
September 30, 2007 |
|
Condominium revenues |
|
$ |
|
|
|
$ |
560 |
|
Condominium costs and expenses |
|
|
311 |
|
|
|
(70 |
) |
|
|
|
|
|
|
|
Gains on condominium sales, before minority interest |
|
|
311 |
|
|
|
490 |
|
Minority interest |
|
|
(4 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
Gains on condominium sales, net of minority interest |
|
$ |
307 |
|
|
$ |
483 |
|
|
|
|
|
|
|
|
3. |
|
INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ENTITIES |
|
|
|
At September 30, 2008, the Company holds investments in various individual limited liability
companies (the Property LLCs) with institutional investors that own apartment communities.
The Company holds a 25% to 35% equity interest in these Property LLCs. The Company and its
joint venture partner also hold an approximate pro-rata 48% interest in a Property LLC that is
in the process of constructing a mixed-use development, consisting of 129 luxury condominium
units, sponsored by the Company and its partner, and Class A office space, sponsored by two
additional independent investors. The Company also has a 50% interest in another Property
LLC that holds land for future development. In 2007, another 35% owned Property LLC completed
the sell-out of a condominium conversion community, initially consisting of 121 units. |
|
|
|
In 2007, the Companys investment in the 25% owned Property LLC resulted from the transfer of
three previously owned apartment communities to the Property LLC co-owned with an institutional
investor. The assets, liabilities and members equity of this Property LLC were recorded at
fair value based on agreed-upon amounts contributed to the Property LLC. At September 30, 2008
and December 31, 2007, the Companys investment in the 25% owned Property LLC reflects a credit
investment of $14,048 and $13,688, respectively, resulting primarily from distributions of
financing proceeds in excess of the Companys historical cost investment. The credit investment
is reflected in consolidated liabilities on the Companys consolidated balance sheet. |
|
|
|
The Company accounts for its investments in these Property LLCs using the equity method of
accounting. At September 30, 2008 and December 31, 2007, the Companys investment in these Property LLCs totaled
$40,874 and $23,036, respectively, excluding the credit investment discussed above. The excess of the Companys
investment over its equity in the underlying net assets of certain Property LLCs was
approximately $6,073 at September 30, 2008. The excess investment related to Property LLCs
owning apartment communities is being amortized as a reduction to earnings on a straight-line
basis over the lives of the related assets. The Company provides real estate services
(development, construction and property management) to the Property LLCs for which it earns
fees. |
|
|
|
The operating results of the Company include its allocable share of net income from the
investments in the Property LLCs. A summary of financial information for the Property LLCs in
the aggregate was as follows: |
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
Balance Sheet Data |
|
2008 |
|
|
2007 |
|
Real estate assets, net of accumulated depreciation of
$19,942 and $15,204, respectively |
|
$ |
381,298 |
|
|
$ |
325,705 |
|
Cash and other |
|
|
18,498 |
|
|
|
7,254 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
399,796 |
|
|
$ |
332,959 |
|
|
|
|
|
|
|
|
Mortgage/construction notes payable |
|
$ |
279,886 |
|
|
$ |
214,549 |
|
Other liabilities |
|
|
9,085 |
|
|
|
5,541 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
288,971 |
|
|
|
220,090 |
|
Members equity |
|
|
110,825 |
|
|
|
112,869 |
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
399,796 |
|
|
$ |
332,959 |
|
|
|
|
|
|
|
|
Companys equity investment in Property LLCs |
|
$ |
26,826 |
|
|
$ |
9,348 |
|
|
|
|
|
|
|
|
-9-
POST PROPERTIES. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
Income Statement Data |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
$ |
6,872 |
|
|
$ |
5,450 |
|
|
$ |
20,359 |
|
|
$ |
12,406 |
|
Other property revenues |
|
|
449 |
|
|
|
372 |
|
|
|
1,332 |
|
|
|
851 |
|
Other |
|
|
11 |
|
|
|
45 |
|
|
|
47 |
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
7,332 |
|
|
|
5,867 |
|
|
|
21,738 |
|
|
|
13,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating and maintenance |
|
|
3,011 |
|
|
|
2,279 |
|
|
|
8,646 |
|
|
|
4,837 |
|
Depreciation and amortization |
|
|
1,753 |
|
|
|
1,920 |
|
|
|
5,989 |
|
|
|
3,861 |
|
Interest |
|
|
2,802 |
|
|
|
1,921 |
|
|
|
7,801 |
|
|
|
3,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
7,566 |
|
|
|
6,120 |
|
|
|
22,436 |
|
|
|
12,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(234 |
) |
|
|
(253 |
) |
|
|
(698 |
) |
|
|
700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
3 |
|
|
|
4 |
|
|
|
1 |
|
|
|
34 |
|
Gains on sales of real estate assets, net |
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
3 |
|
|
|
45 |
|
|
|
1 |
|
|
|
851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(231 |
) |
|
$ |
(208 |
) |
|
$ |
(697 |
) |
|
$ |
1,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys share of net income |
|
$ |
260 |
|
|
$ |
402 |
|
|
$ |
1,081 |
|
|
$ |
1,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2007, gains (losses) on real estate assets
represent net gains (losses) from condominium sales at the condominium conversion community held
by a Property LLC that completed its sell out in 2007.
At September 30, 2008, mortgage/construction notes payable includes a $50,500 mortgage note that
bears interest at 5.82%, requires monthly interest only payments and matures in 2013. The note
is prepayable without penalty in September 2011. Another mortgage note payable totaling $29,272
bears interest at 5.83%, requires monthly interest only payments and matures in 2013. The note
is prepayable without penalty in September 2011. These mortgage notes refinanced existing
mortgage indebtedness that carried interest rates of 4.13% and 4.04%,
respectively.
Three additional mortgage notes were entered into in conjunction with the formation of the 25%
owned Property LLC in 2007. Two notes total $85,723, bear interest at 5.63%, require interest
only payments and mature in 2017. The third mortgage note totals $41,000, bears interest at
5.71%, requires interest only payments, and matures in 2017.
In 2007, the Property LLC constructing the mixed-use development and a related Property LLC
holding land for future development entered into a construction loan facility with an aggregate
capacity of $187,128. At September 30, 2008, the construction loan had an outstanding balance
of $73,390, bears interest at LIBOR plus 1.35% and matures in 2011. Under the terms of the
construction loan facility, the Company and its equity partner have jointly and severally
guaranteed approximately $25,313 of the construction loan held at the unconsolidated Property
LLC attributable to the condominium portion of the project as well as certain debt service
payments of the condominium portion of the loan held at the unconsolidated Property LLC not to
exceed approximately $6,153. Finally, all of the equity owners of the project at the
unconsolidated Property LLC, including the Company, have jointly and
severally guaranteed the completion of the first
building of the project.
In periods prior to the third quarter of 2008, the Company held a 50% interest in an
unconsolidated limited liability company (the LLC), which now holds the approximate pro-rata
48% interest in the Property LLC constructing condominiums as part of a mixed-use development
with other investors as discussed above. In the third quarter of 2008, the Company invested
additional equity of $15,500 in the LLC, for which it received a
preferred equity interest and which resulted in the Company obtaining a controlling
financial interest in the LLC. As such, the Company consolidated the LLC at September 30, 2008.
As stated above, the LLCs principal asset is its $30,141 investment in the Property LLC, which
is included in investments in and advances to unconsolidated entities on the Companys
consolidated balance sheet. In conjunction with the Companys additional equity investment in
the LLC, the LLC entered into a licensing and branding arrangement with a third party. This
arrangement provides for the payment of a guaranteed licensing fee on the sale of the
condominium units. The payment of the licensing fee will be paid from the proceeds of
condominium sales at the LLC.
-10-
POST PROPERTIES. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
4. |
|
INDEBTEDNESS |
|
|
|
At September 30, 2008 and December 31, 2007, the Companys indebtedness consisted of the
following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment |
|
|
|
|
|
|
|
Maturity |
|
September 30, |
|
|
December 31, |
|
Description |
|
Terms |
|
Interest Rate |
|
|
|
|
Date |
|
2008 |
|
|
2007 |
|
Senior Unsecured Notes |
|
Int. |
|
|
5.13% - 7.70% |
(1) |
|
|
|
2010-2013 |
|
$ |
535,000 |
|
|
$ |
535,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured Lines of Credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated Line of Credit |
|
N/A |
|
LIBOR + 0.575% |
(2) |
|
|
|
2010 |
|
|
100,000 |
|
|
|
245,000 |
|
Cash Management Line |
|
N/A |
|
LIBOR + 0.575% |
|
|
|
|
2010 |
|
|
25,882 |
|
|
|
12,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,882 |
|
|
|
257,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA |
|
Prin. and Int. |
|
Remarketed rate |
(3) |
|
|
|
2029 |
|
|
92,275 |
|
|
|
94,000 |
|
Other |
|
Prin. and Int. |
|
|
4.27% - 6.50% |
(4) |
|
|
|
2009-2015 |
|
|
290,261 |
|
|
|
172,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
382,536 |
|
|
|
266,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
$ |
1,043,418 |
|
|
$ |
1,059,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Of the Companys senior unsecured notes, notes for
approximately $185,000 bearing interest at 7.7% mature
in 2010. The remaining notes mature between 2011 and 2013. |
|
(2) |
|
Represents stated rate. At September 30, 2008, the weighted average interest
rate was 3.48%. |
|
(3) |
|
FNMA credit enhanced taxable bonds accrue interest at a variable remarketed
rate established weekly. Prior to the third quarter of 2008, the interest was
fixed at 6.15%, inclusive if credit enhancement and other fees, through an interest
rate swap arrangement. Due to the credit market instability in the third quarter
of 2008, the interest rate swap became ineffective (see note 6) and the weighted
average effective interest costs under the debt arrangement averaged approximately
6.7% for the third quarter. Until credit markets stabilize, interest costs may
continue to fluctuate and may be higher than the effective 6.15% fixed rate paid in
prior periods. The interest rate swap arrangement expires on July
31, 2009 at
which time the Company will be required to replace the swap with a new interest
rate hedge arrangement with a 5-year term. As of that same date, the Company also
has the option of pre-paying the loan. |
|
(4) |
|
Of the Companys secured notes, notes for approximately
$39,645 bearing interest at 6.5% and $34,108 bearing interest at
4.3% mature in 2009. The remaining notes mature between 2011 and 2015. |
Debt maturities
The aggregate maturities of the Companys indebtedness are as follows:
|
|
|
|
|
Remainder of 2008 |
|
$ |
965 |
|
2009 |
|
|
76,618 |
|
2010 |
|
|
314,510 |
(1) |
2011 |
|
|
141,431 |
|
2012 |
|
|
103,296 |
|
Thereafter |
|
|
406,598 |
|
|
|
|
|
|
|
$ |
1,043,418 |
|
|
|
|
|
|
|
|
(1) |
|
Includes outstanding balances on lines of
credit totaling $125,882. |
Debt issuances
In January 2008, the Company closed a $120,000 secured, fixed rate mortgage note payable. The
note bears interest at 4.88%, requires interest only payments and matures in 2015. The note
contains an automatic one year extension under which the interest rate converts to a variable
rate, as defined.
In October 2008, the Company closed six cross-collateralized secured mortgage notes payable.
The mortgage notes have an aggregate principle amount of $184,683, require fixed, interest-only
payments at 6.09% and mature in 2014. The mortgage notes are prepayable without penalty
beginning after October 2012. Net financing proceeds were used primarily to pay down the
Companys revolving lines of credit, with the remainder invested in cash equivalents.
-11-
POST PROPERTIES. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
|
|
Unsecured Lines of Credit |
|
|
|
At September 30, 2008, the Company utilizes a $600,000 syndicated unsecured revolving line of
credit (the Syndicated Line) that matures in April 2010 for its short-term financing needs.
The Syndicated Line may be extended for an additional year through April 2011. The Syndicated
Line currently has a stated interest rate of LIBOR plus 0.575% or the prime rate and was
provided by a syndicate of 17 banks led by Wachovia Bank, N.A. and JP Morgan Securities, Inc.
Additionally, the Syndicated Line requires the payment of annual facility fees currently equal
to 0.15% of the aggregate loan commitment. The Syndicated Line provides for the interest rate
and facility fee rate to be adjusted up or down based on changes in the credit ratings on the
Companys senior unsecured debt. The rates under the Syndicated Line are based on the higher of
the Companys unsecured debt ratings in instances where the Company has split unsecured debt
ratings. The Syndicated Line also includes a competitive bid option for short-term funds up to
50% of the loan commitment at rates generally below the stated line rate. The credit agreement
for the Syndicated Line contains customary restrictions, representations, covenants and events
of default, including fixed charge coverage and maximum leverage ratios. The Syndicated Line
also restricts the amount of capital the Company can invest in specific categories of assets,
such as improved land, properties under construction, condominium properties, non-multifamily
properties, debt or equity securities, notes receivable and unconsolidated affiliates. At
September 30, 2008, the Company had issued letters of credit to third parties totaling $3,692
under this facility. |
|
|
|
Additionally, at September 30, 2008, the Company had a $30,000 unsecured line of credit with
Wachovia Bank, N.A. (the Cash Management Line). The Cash Management Line matures in April
2010 and carries pricing and terms, including debt covenants, substantially consistent with the
Syndicated Line. |
|
5. |
|
SHAREHOLDERS EQUITY |
|
|
|
Computation of Earnings (Loss) Per Common Share |
|
|
|
For the three and nine months ended September 30, 2008 and 2007, a reconciliation of the
numerator and denominator used in the computation of basic and diluted income (loss) from
continuing operations per common share is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Income (loss) from continuing operations available to
common shareholders (numerator): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(1,886 |
) |
|
$ |
6,362 |
|
|
$ |
(34,195 |
) |
|
$ |
70,016 |
|
Less: Preferred stock dividends |
|
|
(1,909 |
) |
|
|
(1,909 |
) |
|
|
(5,728 |
) |
|
|
(5,728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations available to
common shareholders |
|
$ |
(3,795 |
) |
|
$ |
4,453 |
|
|
$ |
(39,923 |
) |
|
$ |
64,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares (denominator): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
44,047 |
|
|
|
43,524 |
|
|
|
43,976 |
|
|
|
43,452 |
|
Dilutive shares from stock options and awards (1) |
|
|
|
|
|
|
577 |
|
|
|
|
|
|
|
714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted (1) |
|
|
44,047 |
|
|
|
44,101 |
|
|
|
43,976 |
|
|
|
44,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the three and nine months ended September 30, 2008, the potential dilution from the
Companys outstanding stock options to purchase 135 and 275 shares, respectively, were
antidilutive to the loss from continuing operations per share calculation. As such, the
amounts were excluded from weighted average shares for the periods. |
For the three and nine months ended September 30, 2008 and 2007, stock options to purchase 2,412
and 216 shares of common stock, respectively, and 2,412 and 194, respectively, were excluded
from the computation of diluted earnings (loss) per common share as these stock options and
awards were antidilutive.
-12-
POST PROPERTIES. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
6. |
|
DERIVATIVE FINANCIAL INSTRUMENTS |
|
|
|
The Company adopted the provisions of SFAS No. 157 on January 1, 2008. To comply with the
provisions of SFAS No. 157, the Companys fair value measurement of its derivative instrument at
September 30, 2008 uses Level 2 observable inputs that incorporate credit valuation adjustments
to appropriately reflect both its risk of nonperformance and the counterpartys risk of
nonperformance. |
|
|
|
At September 30, 2008, the Company had an outstanding interest rate swap agreement with a
notional value of approximately $92,145 with a maturity date in 2009. The interest rate swap
agreement is included on the accompanying consolidated balance sheet at fair value, representing
a liability of $1,526. During the third quarter of 2008, the interest rate swap arrangement,
previously accounted for as a cash flow hedge, became ineffective under generally accepted
accounting principles (SFAS No. 133, as amended). As a result, the gross increase in the market
value of the interest rate swap arrangement for the three months ended September 30, 2008 of
$663 was recognized in other income in the consolidated statement of operations. In addition,
under SFAS No. 133, as amended, the Company is required to amortize into expense the cumulative
unrecognized loss on the interest rate swap of $2,189, previously included in shareholders
equity, over the remaining life of the swap through 2009. Total amortization expense related to
this swap was $508 for the three and nine months ended September 30, 2008. |
|
|
|
In prior years, a previous interest rate swap arrangement, accounted for as a cash flow hedge,
became ineffective under generally accepted accounting principles (SFAS No. 133, as amended).
Under SFAS No. 133, as amended, the Company is required to amortize into interest expense the
cumulative unrecognized loss on the terminated interest rate swap arrangement of $4,021,
included in shareholders equity, over the remaining original life of the swap through 2009.
Total amortization expense related to this swap was $281 and $280, respectively, for the three
months ended and $843 and $842, respectively, for the nine months ended September 30, 2008 and
2007. |
|
|
|
On February 1, 2008, a $28,495 interest rate cap arrangement expired on its maturity date with
no change in value from December 31, 2007. |
|
|
|
A summary of comprehensive income (loss) for the three and nine months ended September 30, 2008
and 2007 is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income (loss) |
|
$ |
27,076 |
|
|
$ |
11,049 |
|
|
$ |
4,699 |
|
|
$ |
99,457 |
|
Change in derivatives, net of minority interest (1) |
|
|
(389 |
) |
|
|
(887 |
) |
|
|
1,376 |
|
|
|
224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
26,687 |
|
|
$ |
10,162 |
|
|
$ |
6,075 |
|
|
$ |
99,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the three and nine months ended September 30, 2008 and 2007, the change in
derivatives balance includes an adjustment of $789 ($783 net of minority interest) and
$280 ($278 net of minority interest), respectively, and $1,351 ($1,341 net of minority
interest) and $842 ($832 net of minority interest), respectively, for amortized swap costs
included in net income. |
7. |
|
SEGMENT INFORMATION |
|
|
|
Segment Description |
|
|
|
In accordance with SFAS No. 131, Disclosure About the Segments of an Enterprise and Related
Information, the Company presents segment information based on the way that management
organizes the segments within the enterprise for making operating decisions and assessing
performance. The segment information is prepared on the same basis as the internally reported
information used by the Companys chief operating decision makers to manage the business. |
|
|
|
The Companys chief operating decision makers focus on the Companys primary sources of income
from apartment community rental operations. Apartment community rental operations are generally
broken down into four segments based on the various stages in the apartment community ownership
lifecycle. These segments are described below. All commercial properties and other ancillary
service and support operations are combined in the line item other in the accompanying segment
information. The segment information presented below reflects the segment categories based on
the lifecycle status of each community as of January 1, 2007. The segment information for the
three and nine months ended September 30, 2007 has been adjusted due to the restatement impact
of reclassifying the operating results of the assets designated as held for sale or sold
subsequent to September 30, 2007 to discontinued operations under SFAS No. 144 (see note 2). |
-13-
POST PROPERTIES. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
|
|
|
Fully stabilized communities those apartment communities which have been stabilized
(the earlier of the point at which a property reaches 95% occupancy or one year after
completion of construction) for both the current and prior year. |
|
|
|
|
Communities stabilized during 2007 communities which reached stabilized occupancy in
the prior year. |
|
|
|
|
Development, rehabilitation and lease-up communities those apartment communities
under development, rehabilitation and lease-up during the period. |
|
|
|
|
Condominium conversion and other communities those portions of existing apartment
communities being converted into condominiums and other communities converted to joint
venture ownership that are reflected in continuing operations. |
|
|
|
|
Acquired communities those communities acquired in the current or prior year. |
Segment Performance Measure
Management uses contribution to consolidated property net operating income (NOI) as the
performance measure for its operating segments. The Company uses net operating income, including
net operating income of stabilized communities, as an operating measure. Net operating income
is defined as rental and other property revenue from real estate operations less total property
and maintenance expenses from real estate operations (excluding depreciation and amortization).
The Company believes that net operating income is an important supplemental measure of operating
performance for a REITs 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 generally incurred at the corporate level. This measure is
particularly useful, in the opinion of the Company, in evaluating the performance of 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. The Company believes that the line on the Companys
consolidated statement of operations entitled net income is the most directly comparable GAAP
measure to net operating income.
-14-
POST PROPERTIES. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
Segment Information
The following table reflects each segments contribution to consolidated revenues and NOI
together with a reconciliation of segment contribution to property NOI to consolidated net
income (loss) for the three and nine months ended September 30, 2008 and 2007. Additionally,
substantially all of the Companys assets relate to the Companys property rental operations.
Asset cost, depreciation and amortization by segment are not presented because such information
at the segment level is not reported internally.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully stabilized communities |
|
$ |
52,037 |
|
|
$ |
51,588 |
|
|
$ |
154,555 |
|
|
$ |
151,377 |
|
Communities stabilized during 2007 |
|
|
2,749 |
|
|
|
2,261 |
|
|
|
7,967 |
|
|
|
5,094 |
|
Development, rehabilitation and lease-up communities |
|
|
5,067 |
|
|
|
4,103 |
|
|
|
13,905 |
|
|
|
11,901 |
|
Condominium conversion and other communities |
|
|
160 |
|
|
|
1,625 |
|
|
|
549 |
|
|
|
8,409 |
|
Acquired communities |
|
|
1,363 |
|
|
|
830 |
|
|
|
4,040 |
|
|
|
830 |
|
Other property segments |
|
|
6,206 |
|
|
|
5,832 |
|
|
|
18,421 |
|
|
|
17,216 |
|
Other |
|
|
261 |
|
|
|
171 |
|
|
|
735 |
|
|
|
416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues |
|
$ |
67,843 |
|
|
$ |
66,410 |
|
|
$ |
200,172 |
|
|
$ |
195,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution to Property Net Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully stabilized communities |
|
$ |
31,189 |
|
|
$ |
30,812 |
|
|
$ |
92,103 |
|
|
$ |
91,069 |
|
Communities stabilized during 2007 |
|
|
1,716 |
|
|
|
1,290 |
|
|
|
4,767 |
|
|
|
2,084 |
|
Development, rehabilitation and lease-up communities |
|
|
2,038 |
|
|
|
2,082 |
|
|
|
5,563 |
|
|
|
5,992 |
|
Condominium conversion and other communities |
|
|
96 |
|
|
|
851 |
|
|
|
333 |
|
|
|
4,706 |
|
Acquired communities |
|
|
781 |
|
|
|
473 |
|
|
|
2,165 |
|
|
|
473 |
|
Other property segments, including corporate management expenses |
|
|
(783 |
) |
|
|
(1,438 |
) |
|
|
(4,051 |
) |
|
|
(5,282 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated property net operating income |
|
|
35,037 |
|
|
|
34,070 |
|
|
|
100,880 |
|
|
|
99,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
96 |
|
|
|
189 |
|
|
|
367 |
|
|
|
652 |
|
Other revenues |
|
|
261 |
|
|
|
171 |
|
|
|
735 |
|
|
|
416 |
|
Minority interest in consolidated property partnerships |
|
|
52 |
|
|
|
(452 |
) |
|
|
113 |
|
|
|
(1,146 |
) |
Depreciation |
|
|
(14,979 |
) |
|
|
(14,522 |
) |
|
|
(43,628 |
) |
|
|
(43,248 |
) |
Interest expense |
|
|
(11,471 |
) |
|
|
(10,658 |
) |
|
|
(31,739 |
) |
|
|
(32,566 |
) |
Amortization of deferred financing costs |
|
|
(869 |
) |
|
|
(828 |
) |
|
|
(2,579 |
) |
|
|
(2,469 |
) |
General and administrative |
|
|
(4,461 |
) |
|
|
(4,761 |
) |
|
|
(15,265 |
) |
|
|
(16,168 |
) |
Investment and development |
|
|
(1,834 |
) |
|
|
(2,007 |
) |
|
|
(4,648 |
) |
|
|
(5,512 |
) |
Strategic review costs |
|
|
|
|
|
|
|
|
|
|
(8,161 |
) |
|
|
|
|
Impairment, severance and other charges |
|
|
(5,002 |
) |
|
|
|
|
|
|
(34,302 |
) |
|
|
|
|
Gains on sales of real estate assets, net |
|
|
476 |
|
|
|
5,061 |
|
|
|
2,227 |
|
|
|
71,506 |
|
Equity in income of unconsolidated real estate entities |
|
|
260 |
|
|
|
402 |
|
|
|
1,081 |
|
|
|
1,216 |
|
Other income (expense), net |
|
|
534 |
|
|
|
(262 |
) |
|
|
426 |
|
|
|
(784 |
) |
Minority interest of common unitholders |
|
|
14 |
|
|
|
(41 |
) |
|
|
298 |
|
|
|
(923 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(1,886 |
) |
|
|
6,362 |
|
|
|
(34,195 |
) |
|
|
70,016 |
|
Income from discontinued operations |
|
|
28,962 |
|
|
|
4,687 |
|
|
|
38,894 |
|
|
|
29,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
27,076 |
|
|
$ |
11,049 |
|
|
$ |
4,699 |
|
|
$ |
99,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. |
|
IMPAIRMENT, SEVERANCE AND OTHER COSTS |
|
|
|
After an evaluation of its development pipeline in light of difficult market conditions, the
Company recorded impairment charges of approximately $28,947 in the second quarter of 2008. The
impairment charges relate to the substantial cessation of current development activities
associated with four land parcels in pre-development which were written down to their estimated
fair market values, as well as the write-off of capitalized pursuit costs associated with
certain abandoned projects. Fair market value for the assets recorded at fair value as of
September 30, 2008 was determined using Level 3 unobservable inputs, such as estimated cash
flows, market capitalization rates and market internal rates of return. |
-15-
POST PROPERTIES. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
Additionally, in the second quarter of 2008, the Company initiated a management and staff
workforce reduction resulting the elimination of 40 employment positions and in severance
charges of approximately $2,238 and $2,591 for the three and nine months ended September 30,
2008, respectively. The impairment and severance charges reflected managements decision to reduce the size
of its workforce and lower overhead expenses in response in part to its decision to reduce the
number of markets in which the Company operates, to sell additional operating assets and to
focus its development strategy on fewer projects in the near term. The Company may also record
additional severance charges in the fourth quarter of 2008 or in future periods, depending on
market conditions and the Companys business plans.
For the three and nine months ended September 30, 2008, the Company recorded estimated casualty
losses of approximately $2,764 related to damage sustained at its Houston, Texas properties as a
result of Hurricane Ike. The Company currently estimates that these losses will be below its
insured wind storm deductible.
In prior years, the Company recorded severance charges associated with the departure of certain
executive officers of the Company. Under certain of these arrangements, the Company is required
to make certain payments and provide specified benefits through 2013 and 2016. The following
table summarizes the activity relating to aggregate net severance charges for such executive
officers for the nine months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Accrued severance charges, beginning of period |
|
$ |
11,215 |
|
|
$ |
12,832 |
|
Severance charges |
|
|
353 |
|
|
|
283 |
|
Payments for period |
|
|
(2,557 |
) |
|
|
(2,129 |
) |
Interest accretion |
|
|
549 |
|
|
|
555 |
|
|
|
|
|
|
|
|
Accrued severance charges, end of period |
|
$ |
9,560 |
|
|
$ |
11,541 |
|
|
|
|
|
|
|
|
9. |
|
SUPPLEMENTAL CASH FLOW INFORMATION |
|
|
|
Interest paid (including capitalized amounts of $9,546 and $8,659 for the nine months ended
September 30, 2008 and 2007, respectively), aggregated $37,896 and $40,799 for the nine months
ended September 30, 2008 and 2007, respectively. |
|
|
|
For the nine months ended September 30, 2008 and 2007, the Company and the Companys taxable
REIT subsidiaries made income tax payments to federal and state taxing authorities totaling
$1,700 and $1,575, respectively. |
|
|
|
Non-cash investing and financing activities for the nine months ended September 30, 2008 and
2007 were as follows: |
|
|
|
For the nine months ended September 30, 2008 and 2007, the Company amortized approximately
$1,351 ($1,341 net of minority interest) and $842 ($832 net of minority interest), respectively,
of accumulated other comprehensive non-cash losses into earnings related to interest rate swap
derivative financial instruments (see note 6). Other than the amortization discussed herein,
for the nine months ended September 30, 2008, the Companys derivative financial instruments,
accounted for as cash flow hedges, increased in value by $663 ($658, net of minority interest),
causing a decrease in accounts payable and accrued expenses and a corresponding increase in the
Companys other income, as this cash flow hedge became
ineffective during the quarter. Other than the amortization discussed
herein, for the nine months ended September 30, 2008, the
Companys derivative financial instruments, accounted for as cash
flow hedges, increased in value causing a decrease in accounts payable
and accrued expenses and a corresponding decrease in
shareholders equity of $35, net of minority interest. Other
than the amortization discussed herein, for the
nine months ended September 30, 2007, the Companys derivative financial instruments accounted
for as cash flow hedges decreased in value causing a decrease in accounts payable and accrued
expenses and a corresponding decrease in shareholders equity of $616 ($607, net of minority
interest). |
|
|
|
For the nine months ended September 30, 2008 and 2007, Common Units in the Operating Partnership
totaling 177 and 96, respectively, were converted into Company common shares on a one-for-one
basis. The net effect of the conversion of Common Units of the Operating Partnership to common
shares of the Company and the adjustments to minority interest for the impact of the Companys
employee stock purchase and stock options plans, decreased minority interest and increased
shareholders equity in the amounts of $3,947 and $2,053 for the nine months ended September 30,
2008 and 2007, respectively. |
|
|
|
The Operating Partnership committed to distribute $19,990 and $21,840 for the three months ended
September 30, 2008 and 2007, respectively. As a result, the Company declared dividends of
$19,858 and $21,566 for the three months ended September 30, 2008 and 2007, respectively. The
remaining distributions from the Operating Partnership in the amount of $132 and $274 for the
three months ended September 30, 2008 and 2007, respectively, are distributed to minority
interest unitholders in the Operating Partnership. |
-16-
POST PROPERTIES. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
|
|
For the nine months ended September 30, 2008 and 2007, the Company issued common shares for
director compensation, totaling $552 and $394, respectively. These stock issuances were
non-cash transactions. |
|
10. |
|
STOCK-BASED COMPENSATION PLANS |
|
|
|
Incentive Stock Plans |
|
|
|
Incentive stock awards are granted under the Companys
2003 Incentive Stock Plan, as amended and restated in
October 2008 (the 2003 Stock Plan). As of December 31, 2007, prior to the amendment of the
plan, there were 1,869 shares available for issuance under the 2003 Stock Plan. The plan was
amended in October 2008 to increase the number of shares of the Companys common stock reserved
for issuance and available for grant by 1,600 shares, so that 3,469 shares of common stock were
reserved for issuance as of January 1, 2008. Of this amount, stock grants count against the
total shares available under the 2003 Stock Plan as 2.7 shares for every one share issued on and
after January 1, 2008, while options (and stock appreciation
rights (SAR) settled in shares) count
against the total shares available as one share for every one share issued on the exercise of an
option (or SAR) on and after January 1, 2008. The exercise price of each option granted under the 2003
Stock Plan may not be less than the market price of the Companys common stock on the date of
the option grant and all options may have a maximum life of ten years. Participants receiving
restricted stock grants are generally eligible to vote such shares and receive dividends on such
shares. Substantially all stock option and restricted stock grants are subject to annual
vesting provisions (generally three to five years) as determined by the compensation committee
overseeing the 2003 Stock Plan. At September 30, 2008, stock options outstanding under the 2003
Stock Plan and the Companys previous stock plan totaled 2,412. |
|
|
|
Compensation costs for stock options have been estimated on the grant date using the
Black-Scholes option-pricing method. The Company did not grant any stock options for the nine
months ended September 30, 2008. For options granted during the nine months ended September 30,
2007, the weighted average assumptions used in the Black-Scholes option-pricing model were
dividend yield of 3.8%, expected volatility of 18.1%, risk-free interest rate of 4.8% and
expected option term of 5.0 years. |
|
|
|
The Companys assumptions were derived from the methodologies discussed herein. The expected
dividend yield reflects the Companys current historical yield, which is expected to approximate
the future yield. Expected volatility was based on the historical volatility of the Companys
common stock. The risk-free interest rate for the expected life of the options was based on the
implied yields on the U.S. Treasury yield curve. The weighted average expected option term was
based on the Companys historical data for prior period stock option exercise and forfeiture
activity. |
|
|
|
For the nine months ended September 30, 2008 and 2007, the Company granted stock options to
purchase zero and 199 shares of Company common stock, respectively, to Company officers and
directors, of which zero and 28 shares, respectively, were granted to the Companys
non-executive chairman of the board. The Company recorded compensation expense related to stock
options of $376 ($373 net of minority interest) and $404 ($398 net of minority interest) for the
three months ended and $1,042 ($1,033 net of minority interest) and $1,162 ($1,145 net of
minority interest) for the nine months ended September 30, 2008 and 2007, respectively, under
the fair value method. Upon the exercise of stock options, the Company issues shares of common
stock from treasury shares or, to the extent treasury shares are not available, from authorized
common shares. |
|
|
|
A summary of stock option activity under all plans for the nine months ended September 30, 2008
and 2007 is presented below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Weighted Average |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Shares |
|
|
Exercise Price |
|
Options outstanding, beginning of period |
|
|
2,455 |
|
|
$ |
34 |
|
|
|
2,375 |
|
|
$ |
33 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
199 |
|
|
|
48 |
|
Exercised |
|
|
(39 |
) |
|
|
37 |
|
|
|
(108 |
) |
|
|
36 |
|
Forfeited |
|
|
(4 |
) |
|
|
32 |
|
|
|
(8 |
) |
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, end of period |
|
|
2,412 |
|
|
|
34 |
|
|
|
2,458 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, end of period |
|
|
2,164 |
|
|
|
33 |
|
|
|
1,774 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of options granted during the period |
|
$ |
|
|
|
|
|
|
|
$ |
7.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008, there was $751 of unrecognized compensation cost related to unvested
stock options. This cost is expected to be recognized over a weighted-average period of 0.8
years. The total intrinsic value of stock options exercised during the nine months ended
September 30, 2008 and 2007 was $194 and $1,395, respectively. The aggregate intrinsic values
of stock
-17-
POST PROPERTIES. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
options outstanding, exercisable and expected to vest at September 30, 2008 was $1,248.
The weighted average remaining
contractual lives of stock options outstanding, exercisable and expected to vest at September
30, 2008 were 4.6, 4.2 and 4.6 years, respectively. Stock options expected to vest at September
30, 2008 totaled 2,398 at a weighted average exercise price of approximately $33.91.
At September 30, 2008, the Company had separated its outstanding options into two ranges based
on exercise prices. There were 1,379 options outstanding with exercise prices ranging from
$23.90 to $36.13. These options have a weighted average exercise price of $29.17 and a weighted
average remaining contractual life of 4.4 years. Of these outstanding options, 1,369 were
exercisable at September 30, 2008 at a weighted average exercise price of $29.17. In addition,
there were 1,033 options outstanding with exercise prices ranging from $36.47 to $48.00. These
options had a weighted average exercise price of $40.37 and a weighted average remaining
contractual life of 4.8 years. Of these outstanding options, 795 were exercisable at September
30, 2008 at a weighted average exercise price of $39.09.
For the nine months ended September 30, 2008 and 2007, the Company granted 78 and 49 shares of
restricted stock, respectively, to Company officers and directors, of which 9 and 4 shares,
respectively, were granted to the Companys non-executive chairman of the board. The restricted
share grants generally vest ratably over three to five year periods. The weighted average grant
date fair value for the restricted shares for the nine months ended September 30, 2008 and 2007
was $42.25 and $48.15, respectively, per share. The total value of the restricted share grants
for the nine months ended September 30, 2008 and 2007 was $3,308 and $2,371, respectively. The
compensation cost is amortized ratably into compensation expense over the applicable vesting
periods. Total compensation expense relating to the restricted stock was $821 ($816 net of
minority interest) and $644 ($634 net of minority interest) for the three months ended and
$2,395 ($2,377 net of minority interest) and $1,748 ($1,723 net of minority interest) for the
nine months ended September 30, 2008 and 2007, respectively.
A summary of the activity related to the Companys restricted stock for the nine months ended
September 30, 2008 and 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant-Date |
|
|
|
|
|
|
Grant-Date |
|
|
|
Shares |
|
|
Fair Value |
|
|
Shares |
|
|
Fair Value |
|
Unvested shares, beginning or period |
|
|
119 |
|
|
$ |
35 |
|
|
|
125 |
|
|
$ |
31 |
|
Granted |
|
|
78 |
|
|
|
42 |
|
|
|
49 |
|
|
|
48 |
|
Vested |
|
|
(26 |
) |
|
|
31 |
|
|
|
(23 |
) |
|
|
28 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested shares, end of period |
|
|
171 |
|
|
|
39 |
|
|
|
150 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008, there was $4,438 of unrecognized compensation cost related to restricted
stock. This cost is expected to be recognized over a weighted average period of 2.0 years. The
total intrinsic value of restricted shares vested for the nine months ended September 30, 2008
and 2007 was $790 and $1,185, respectively. |
|
|
|
Employee Stock Purchase Plan |
|
|
|
The Company maintains an Employee Stock Purchase Plan (the ESPP) under a plan approved by
Company shareholders in 2005, and the maximum number of shares issuable is 300. The purchase
price of shares of common stock under the ESPP is equal to 85% of the lesser of the closing
price per share of common stock on the first or last day of the trading period, as defined. The
Company records the aggregate cost of the ESPP (generally the 15% discount on the share
purchases) as a period expense. Total compensation expense relating to the ESPP was $36 and $40
for the three months ended and $113 and $162 for the nine months ended September 30, 2008 and
2007, respectively. |
|
11. |
|
INCOME TAXES |
|
|
|
The Company has elected to be taxed as a REIT under the Code. To qualify as a REIT, the Company
must distribute annually at least 90% of its adjusted taxable income, as defined in the Code, to
its shareholders and satisfy certain other organizational and operating requirements. It is
managements current intention to adhere to these requirements and maintain the Companys REIT
status. As a REIT, the Company generally will not be subject to federal income tax at the
corporate level on the taxable income it distributes to its shareholders. Should the Company
fail to qualify as a REIT in any tax year, it may be subject to federal income taxes at regular
corporate rates (including any applicable alternative minimum tax) and may not be able to
qualify as a REIT for |
-18-
POST PROPERTIES. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
|
|
four subsequent taxable years. The Company may be subject to certain state and local taxes on
its income and property, and to federal income taxes and excise taxes on its undistributed
taxable income. |
|
|
|
In the preparation of income tax returns in federal and state jurisdictions, the Company and its
taxable REIT subsidiaries assert certain tax positions based on their understanding and
interpretation of the income tax law. The taxing authorities may challenge such positions and
the resolution of such matters could result in the payment and recognition of additional income
tax expense. Management believes it has used reasonable judgments and conclusions in the
preparation of its income tax returns. The Company and its subsidiaries (including the TRSs)
income tax returns are subject to examination by federal and state tax jurisdictions for years
2005 through 2007. Net income tax loss carryforwards and other tax attributes generated in
years prior to 2005 are also subject to challenge in any examination of the 2005 to 2007 tax
years. Subsequent to September 30, 2008, the Company received notice that its TRSs federal
income tax return for 2005 has been selected for Internal Revenue Service
examination. At this stage, it is not possible to predict or determine the outcome of the
examination, nor is it possible to estimate the amount or whether any adjustments will be
required to that tax return. |
|
|
|
As of September 30, 2008, the Companys taxable REIT subsidiaries (TRSs) had unrecognized tax
benefits of approximately $797 which primarily related to uncertainty regarding the
sustainability of certain deductions taken on prior year income tax returns of the TRS with
respect to the amortization of certain intangible assets. The Company does not expect any
significant change in this unrecognized tax benefit in the remainder of 2008. To the extent
these unrecognized tax benefits are ultimately recognized, they may affect the effective tax
rate in a future period. The Companys policy is to recognize interest and penalties, if any,
related to unrecognized tax benefits as income tax expense. Accrued interest and penalties for
the three and nine months ended September 30, 2008 and at September 30, 2008 were not material
to the Companys results of operations, cash flows or financial position. |
|
|
|
The Company utilizes TRSs principally to perform such non-REIT activities as asset and property
management, for-sale housing (condominiums) conversions and sales and other services. These
TRSs are subject to federal and state income taxes. For the three and nine months ended
September 30, 2008, the TRS recorded no net income tax expense (benefit) as the provision for
estimated income taxes payable is expected to be fully offset by deferred tax benefits resulting
from current period temporary differences and reductions of valuation allowances recorded in
prior years. |
|
|
|
At December 31, 2007, management had established valuation allowances of approximately $3,157
against net deferred tax assets due primarily to historical losses at the TRSs in years prior to
2007 and the variability of the income of these subsidiaries. The tax benefits associated with
such unused valuation allowances may be recognized in future periods, if the taxable REIT
subsidiaries generate sufficient taxable income to utilize such amounts or if the Company
determines that it is more likely than not that the related deferred tax assets are realizable. |
|
|
|
A summary of the components of the TRS deferred tax assets and liabilities at December 31, 2007
are included in the footnotes to the Companys audited financial statements included in the Form
10-K, as amended. Other than the activity discussed above relating to the three and nine months
ended September 30, 2008, there were no material changes to the components of deferred tax
assets and liabilities at September 30, 2008. |
|
12. |
|
LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES |
|
|
|
In November 2006, the Equal Rights Center (ERC) 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 (FHA) and the Americans with
Disabilities Act (ADA) 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, 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 FHA and the ADA and
prohibiting construction or sale of noncompliant units or complexes. On April 18, 2007,
ERC filed a motion for a preliminary injunction to prohibit the Company and the Operating
Partnership from selling any alleged noncompliant apartment communities or condominium units
while the litigation is ongoing. On July 25, 2007 the court entered an order denying ERCs
motion for the preliminary injunction. Fact discovery is mostly completed by both parties,
and the parties exchanged affirmative expert reports on July 8, 2008. On August 1, 2008,
ERC disclosed an alleged $9 million dollar damages assessment for a
portion of the compensatory damages
claimed. On August 12, 2008, the Company and the Operating Partnership filed a motion to
strike all evidence regarding that new assessment. A hearing on that motion will be held on
December 9, 2008. The parties exchanged expert rebuttal reports on October 3, 2008. Expert
discovery is scheduled to be completed by November 18, 2008, and the last briefing on
dispositive motions is due by February 3, 2009. It is possible that these dates could be
further extended. At
|
-19-
POST PROPERTIES. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
this stage in the proceeding, it is not possible to predict or determine
the outcome of the lawsuit, nor is it possible to estimate the amount of loss 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 Companys results of operations or financial position.
The Company is underway with an initiative to engage third-party engineers and consultants to
inspect and evaluate each of its communities that have stucco exteriors or exterior insulation
finishing systems (EIFS) for potential water penetration and other related issues. At this
early stage of the process, the Company has preliminarily determined that varying levels of
remediation and improvements may be required to be performed at approximately 30 properties in
its portfolio containing a total of approximately 11,000 units. The Company preliminarily
estimates that the aggregate cost of this initiative could be in the range of $40,000 to $45,000
to complete the scope of the remediation and improvements, although the scope and cost will vary
considerably among individual properties. The work is currently expected to be completed
between now and the end of 2010 and may include, but not be limited to, remediation,
improvements and replacements of exterior stucco and EIFS siding, windows and doors, roofing and
gutters, exterior sealants and coatings. There can be no assurance that the scope of work or the
Companys preliminary estimates of costs will not change in the future. The component cost of
the remediation, improvements and replacements will either be capitalized or expensed as
incurred in accordance with the Companys normal accounting policy for capitalization of fixed
assets (see Item 2, Managements Discussion and Analysis of Financial Condition and Results of
Operations, Capitalization of Fixed Assets and Community Improvements for further discussion).
In addition, as a result of the scope of this work, if the Company should be required to retire
existing components of fixed assets on its consolidated balance sheet, it could result in
acceleration of depreciation or other charges in subsequent periods relating to the
undepreciated portion of these components. At this early stage of the process, however, it is
not possible to estimate the potential impact on the Companys financial position and results of
operations in subsequent periods other than as discussed above.
-20-
POST APARTMENT HOMES, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Real estate assets |
|
|
|
|
|
|
|
|
Land |
|
$ |
235,757 |
|
|
$ |
276,680 |
|
Building and improvements |
|
|
1,677,522 |
|
|
|
1,840,563 |
|
Furniture, fixtures and equipment |
|
|
195,929 |
|
|
|
204,433 |
|
Construction in progress |
|
|
139,154 |
|
|
|
134,125 |
|
Land held for future development |
|
|
123,902 |
|
|
|
154,617 |
|
|
|
|
|
|
|
|
|
|
|
2,372,264 |
|
|
|
2,610,418 |
|
Less: accumulated depreciation |
|
|
(514,029 |
) |
|
|
(562,226 |
) |
For-sale condominiums |
|
|
20,167 |
|
|
|
38,844 |
|
Assets held for sale, net of accumulated depreciation of $86,383 and
$4,031 at September 30, 2008 and December 31, 2007, respectively |
|
|
244,659 |
|
|
|
24,576 |
|
|
|
|
|
|
|
|
Total real estate assets |
|
|
2,123,061 |
|
|
|
2,111,612 |
|
Investments in and advances to unconsolidated real estate entities |
|
|
40,874 |
|
|
|
23,036 |
|
Cash and cash equivalents |
|
|
4,343 |
|
|
|
11,557 |
|
Restricted cash |
|
|
11,716 |
|
|
|
5,642 |
|
Deferred charges, net |
|
|
9,489 |
|
|
|
10,538 |
|
Other assets |
|
|
38,649 |
|
|
|
105,756 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,228,132 |
|
|
$ |
2,268,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and partners equity |
|
|
|
|
|
|
|
|
Indebtedness, including $62,908 and $0 secured by assets held
for sale as of September 30, 2008 and December 31, 2007, respectively |
|
$ |
1,043,418 |
|
|
$ |
1,059,066 |
|
Accounts payable and accrued expenses |
|
|
110,581 |
|
|
|
100,215 |
|
Distribution payable |
|
|
19,990 |
|
|
|
19,933 |
|
Accrued interest payable |
|
|
13,474 |
|
|
|
4,388 |
|
Security deposits and prepaid rents |
|
|
16,903 |
|
|
|
11,708 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,204,366 |
|
|
|
1,195,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests in consolidated real estate entities |
|
|
9,542 |
|
|
|
3,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Partners equity |
|
|
|
|
|
|
|
|
Preferred units |
|
|
95,000 |
|
|
|
95,000 |
|
Common units |
|
|
|
|
|
|
|
|
General partner |
|
|
10,769 |
|
|
|
11,329 |
|
Limited partner |
|
|
911,073 |
|
|
|
966,535 |
|
Accumulated other comprehensive income (loss) |
|
|
(2,618 |
) |
|
|
(4,005 |
) |
|
|
|
|
|
|
|
Total partners equity |
|
|
1,014,224 |
|
|
|
1,068,859 |
|
|
|
|
|
|
|
|
Total liabilities and partners equity |
|
$ |
2,228,132 |
|
|
$ |
2,268,141 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-21-
POST APARTMENT HOMES, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
$ |
63,700 |
|
|
$ |
62,460 |
|
|
$ |
188,174 |
|
|
$ |
183,998 |
|
Other property revenues |
|
|
3,882 |
|
|
|
3,779 |
|
|
|
11,263 |
|
|
|
10,829 |
|
Other |
|
|
261 |
|
|
|
171 |
|
|
|
735 |
|
|
|
416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
67,843 |
|
|
|
66,410 |
|
|
|
200,172 |
|
|
|
195,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property operating and maintenance (exclusive of items
shown separately below) |
|
|
32,545 |
|
|
|
32,169 |
|
|
|
98,557 |
|
|
|
95,785 |
|
Depreciation |
|
|
14,979 |
|
|
|
14,522 |
|
|
|
43,628 |
|
|
|
43,248 |
|
General and administrative |
|
|
4,461 |
|
|
|
4,761 |
|
|
|
15,265 |
|
|
|
16,168 |
|
Investment, development and other |
|
|
1,834 |
|
|
|
2,007 |
|
|
|
4,648 |
|
|
|
5,512 |
|
Strategic review costs |
|
|
|
|
|
|
|
|
|
|
8,161 |
|
|
|
|
|
Impairment, severance and other costs |
|
|
5,002 |
|
|
|
|
|
|
|
34,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
58,821 |
|
|
|
53,459 |
|
|
|
204,561 |
|
|
|
160,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
9,022 |
|
|
|
12,951 |
|
|
|
(4,389 |
) |
|
|
34,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
96 |
|
|
|
189 |
|
|
|
367 |
|
|
|
652 |
|
Interest expense |
|
|
(11,471 |
) |
|
|
(10,658 |
) |
|
|
(31,739 |
) |
|
|
(32,566 |
) |
Amortization of deferred financing costs |
|
|
(869 |
) |
|
|
(828 |
) |
|
|
(2,579 |
) |
|
|
(2,469 |
) |
Gains on sales of real estate assets, net |
|
|
476 |
|
|
|
5,061 |
|
|
|
2,227 |
|
|
|
71,506 |
|
Equity in income of unconsolidated real estate entities |
|
|
260 |
|
|
|
402 |
|
|
|
1,081 |
|
|
|
1,216 |
|
Other income (expense), net |
|
|
534 |
|
|
|
(262 |
) |
|
|
426 |
|
|
|
(784 |
) |
Minority interest in consolidated property partnerships |
|
|
52 |
|
|
|
(452 |
) |
|
|
113 |
|
|
|
(1,146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(1,900 |
) |
|
|
6,403 |
|
|
|
(34,493 |
) |
|
|
70,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued property operations |
|
|
5,654 |
|
|
|
4,442 |
|
|
|
13,353 |
|
|
|
12,423 |
|
Gains on sales of real estate assets |
|
|
23,520 |
|
|
|
311 |
|
|
|
25,831 |
|
|
|
17,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
29,174 |
|
|
|
4,753 |
|
|
|
39,184 |
|
|
|
29,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
27,274 |
|
|
|
11,156 |
|
|
|
4,691 |
|
|
|
100,826 |
|
Distributions to preferred unitholders |
|
|
(1,909 |
) |
|
|
(1,909 |
) |
|
|
(5,728 |
) |
|
|
(5,728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common unitholders |
|
$ |
25,365 |
|
|
$ |
9,247 |
|
|
$ |
(1,037 |
) |
|
$ |
95,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common unit data Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
(net of preferred distributions) |
|
$ |
(0.09 |
) |
|
$ |
0.10 |
|
|
$ |
(0.91 |
) |
|
$ |
1.48 |
|
Income from discontinued operations |
|
|
0.66 |
|
|
|
0.11 |
|
|
|
0.88 |
|
|
|
0.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common unitholders |
|
$ |
0.57 |
|
|
$ |
0.21 |
|
|
$ |
(0.02 |
) |
|
$ |
2.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common units outstanding basic |
|
|
44,340 |
|
|
|
44,133 |
|
|
|
44,306 |
|
|
|
44,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common unit data Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
(net of preferred distributions) |
|
$ |
(0.09 |
) |
|
$ |
0.10 |
|
|
$ |
(0.91 |
) |
|
$ |
1.46 |
|
Income from discontinued operations |
|
|
0.66 |
|
|
|
0.11 |
|
|
|
0.88 |
|
|
|
0.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common unitholders |
|
$ |
0.57 |
|
|
$ |
0.21 |
|
|
$ |
(0.02 |
) |
|
$ |
2.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common units outstanding diluted |
|
|
44,340 |
|
|
|
44,709 |
|
|
|
44,306 |
|
|
|
44,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-22-
POST APARTMENT HOMES, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS EQUITY
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Common Units |
|
|
Other |
|
|
|
|
|
|
Preferred |
|
|
General |
|
|
Limited |
|
|
Comprehensive |
|
|
|
|
|
|
Units |
|
|
Partner |
|
|
Partners |
|
|
Income (Loss) |
|
|
Total |
|
Partners Equity, December 31, 2007 |
|
$ |
95,000 |
|
|
$ |
11,329 |
|
|
$ |
966,535 |
|
|
$ |
(4,005 |
) |
|
$ |
1,068,859 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
5,728 |
|
|
|
(10 |
) |
|
|
(1,027 |
) |
|
|
|
|
|
|
4,691 |
|
Net change in derivative value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,387 |
|
|
|
1,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,078 |
|
Contributions from the Company related to employee
stock purchase, stock option and other plans |
|
|
|
|
|
|
14 |
|
|
|
1,405 |
|
|
|
|
|
|
|
1,419 |
|
Equity-based compensation |
|
|
|
|
|
|
36 |
|
|
|
3,514 |
|
|
|
|
|
|
|
3,550 |
|
Distributions to preferred unitholders |
|
|
(5,728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,728 |
) |
Distributions to common unitholders
($1.35 per unit) |
|
|
|
|
|
|
(600 |
) |
|
|
(59,354 |
) |
|
|
|
|
|
|
(59,954 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners Equity, September 30, 2008 |
|
$ |
95,000 |
|
|
$ |
10,769 |
|
|
$ |
911,073 |
|
|
$ |
(2,618 |
) |
|
$ |
1,014,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-23-
POST APARTMENT HOMES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per unit data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,691 |
|
|
$ |
100,826 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
47,251 |
|
|
|
50,889 |
|
Amortization of deferred financing costs |
|
|
2,579 |
|
|
|
2,469 |
|
Minority interest in consolidated entities |
|
|
362 |
|
|
|
1,416 |
|
Gains on sales of real estate assets |
|
|
(28,059 |
) |
|
|
(88,969 |
) |
Other expense |
|
|
689 |
|
|
|
842 |
|
Asset impairment charges |
|
|
28,947 |
|
|
|
|
|
Equity in income of unconsolidated entities |
|
|
(1,081 |
) |
|
|
(1,216 |
) |
Distributions of earnings of unconsolidated entities |
|
|
2,059 |
|
|
|
1,838 |
|
Deferred compensation |
|
|
552 |
|
|
|
394 |
|
Equity-based compensation |
|
|
3,549 |
|
|
|
3,072 |
|
Changes in assets, increase in: |
|
|
|
|
|
|
|
|
Other assets |
|
|
(2,219 |
) |
|
|
(3,891 |
) |
Deferred charges |
|
|
(182 |
) |
|
|
(139 |
) |
Changes in liabilities, increase (decrease) in: |
|
|
|
|
|
|
|
|
Accrued interest payable |
|
|
9,086 |
|
|
|
7,882 |
|
Accounts payable and accrued expenses |
|
|
11,973 |
|
|
|
2,141 |
|
Security deposits and prepaid rents |
|
|
(879 |
) |
|
|
660 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
79,318 |
|
|
|
78,214 |
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|
Construction and acquisition of real estate assets, net of payables |
|
|
(104,972 |
) |
|
|
(227,402 |
) |
Net proceeds from sales of real estate assets |
|
|
151,661 |
|
|
|
182,231 |
|
Capitalized interest |
|
|
(9,546 |
) |
|
|
(8,659 |
) |
Annually recurring capital expenditures |
|
|
(8,592 |
) |
|
|
(8,815 |
) |
Periodically recurring capital expenditures |
|
|
(5,114 |
) |
|
|
(5,623 |
) |
Community rehabilitation and other revenue generating capital expenditures |
|
|
(12,554 |
) |
|
|
(10,646 |
) |
Corporate additions and improvements |
|
|
(613 |
) |
|
|
(1,932 |
) |
Distributions from (investments in and advances to) unconsolidated entities |
|
|
(11,727 |
) |
|
|
25,788 |
|
Note receivable collections and other investments |
|
|
1,624 |
|
|
|
837 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
167 |
|
|
|
(54,221 |
) |
|
|
|
|
|
|
|
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
Lines of credit proceeds (repayments), net |
|
|
(131,393 |
) |
|
|
149,734 |
|
Proceeds from indebtedness |
|
|
120,000 |
|
|
|
|
|
Payments on indebtedness |
|
|
(3,865 |
) |
|
|
(112,159 |
) |
Payments of financing costs and other |
|
|
(5,052 |
) |
|
|
(257 |
) |
Redemption of common units |
|
|
|
|
|
|
(3,694 |
) |
Contributions from the Company related to employee stock
purchase and stock option plans |
|
|
867 |
|
|
|
4,470 |
|
Capital contributions (distributions) of minority interests |
|
|
(1,631 |
) |
|
|
429 |
|
Distributions to common unitholders |
|
|
(59,897 |
) |
|
|
(59,717 |
) |
Distributions to preferred unitholders |
|
|
(5,728 |
) |
|
|
(3,819 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(86,699 |
) |
|
|
(25,013 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
(7,214 |
) |
|
|
(1,020 |
) |
Cash and cash equivalents, beginning of period |
|
|
11,557 |
|
|
|
3,663 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
4,343 |
|
|
$ |
2,643 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
-24-
POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
1. |
|
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES |
|
|
|
Organization |
|
|
|
Post Apartment Homes, L.P. (the Operating Partnership), a Georgia limited partnership, and its
subsidiaries develop, own and manage upscale multi-family apartment communities in selected
markets in the United States. Post Properties, Inc. (the Company) through its wholly-owned
subsidiaries is the sole general partner, a limited partner and owns a majority interest in the
Operating Partnership. The Operating Partnership, through its operating divisions and
subsidiaries conducts substantially all of the on-going operations of Post Properties, Inc., a
publicly traded company which operates as a self-administered and self-managed real estate
investment trust. |
|
|
|
At September 30, 2008, the Company owned 99.3% of the common limited partnership interests
(Common Units) in the Operating Partnership and 100% of the preferred limited partnership
interests (Preferred Units). The Companys weighted average common ownership interest in the
Operating Partnership was 99.3% and 98.6% for the three months ended and 99.3% and 98.6% for the
nine months ended September 30, 2008 and 2007, respectively. Common Units held by persons other
than the Company totaled 293 at September 30, 2008 and represented a 0.7% ownership interest in
the Operating Partnership. Each Common Unit may be redeemed by the holder thereof for either one
share of Company common stock or cash equal to the fair market value thereof at the time of such
redemptions, at the option of the Operating Partnership. The Operating Partnership presently
anticipates that it will cause shares of common stock to be issued in connection with each such
redemption rather than paying cash (as has been done in all redemptions to date). With each
redemption of outstanding Common Units for Company common stock, the Companys percentage
ownership interest in the Operating Partnership will increase. In addition, whenever the Company
issues shares of common stock, the Company will contribute any net proceeds therefrom to the
Operating Partnership and the Operating Partnership will issue an equivalent number of Common
Units to the Company. |
|
|
|
At September 30, 2008, the Company owned 21,890 apartment units in 60 apartment communities,
including 1,747 apartment units in five communities held in unconsolidated entities and 1,736
apartment units in five communities currently under construction and/or in lease-up. The
Operating Partnership is also developing and selling 506 for-sale condominium homes in four
communities (including 129 units in one community held in an unconsolidated entity) and is
converting apartment homes in two communities initially consisting of 349 units into for-sale
condominium homes through a taxable REIT subsidiary. At September 30, 2008, approximately
40.9%, 20.3%, 12.1% and 10.1% (on a unit basis) of the Operating Partnerships operating
communities were located in the Atlanta, Dallas, the greater Washington D.C. and Tampa
metropolitan areas, respectively. |
|
|
|
Under the provisions of the limited partnership agreement, as amended, Operating Partnership net
profits, net losses and cash flow (after allocations to preferred ownership interests) are
allocated to the partners in proportion to their common ownership interests. Cash distributions
from the Operating Partnership shall be, at a minimum, sufficient to enable the Company to
satisfy its annual dividend requirements to maintain its REIT status under the Code. |
|
|
|
Conclusion of Strategic Process |
|
|
|
On January 23, 2008, the Operating Partnership announced that its Board of Directors had
authorized management, working with financial and legal advisors, to initiate a formal process
to pursue a possible business combination or other sale transaction and to seek proposals from
potentially interested parties. The Board ended the process on June 25, 2008 due to the
increasingly difficult market environment and a lack of definitive proposals. For the nine
months ended September 30, 2008, the Operating Partnership incurred approximately $8,161 of
strategic review costs related to this process. |
|
|
|
Basis of Presentation |
|
|
|
The accompanying unaudited financial statements have been prepared by the Operating
Partnerships management in accordance with generally accepted accounting principles for interim
financial information and applicable rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all of the information and disclosures required by
generally accepted accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normally recurring adjustments) considered
necessary for a fair presentation have been included. The results of operations for the three
and nine months ended September 30, 2008 are not necessarily indicative of the results that may
be expected for the full year. These financial statements should be read in conjunction with
the Operating Partnerships audited financial statements and notes thereto included in its
Annual Report on Form 10-K, as amended, for the year ended December 31, 2007 (the Form 10-K). |
-25-
POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
The accompanying consolidated financial statements include the consolidated accounts of the
Operating Partnership and their wholly owned subsidiaries. The Operating Partnership also
consolidates other entities in which it has a controlling financial interest or entities where
it is determined to be the primary beneficiary under Financial Accounting Standards Board
Interpretation No. 46R (FIN 46R), Consolidation of Variable Interest Entities. Under FIN
46R, variable interest entities (VIEs) are generally entities that lack sufficient equity to
finance their activities without additional financial support from other parties or whose equity
holders lack adequate decision making ability. The primary beneficiary is required to
consolidate a VIE for financial reporting purposes. The application of FIN 46R requires
management to make significant estimates and judgments about the Operating Partnerships and its
other partners rights, obligations and economic interests in such entities. For entities in
which the Operating Partnership has less than a controlling financial interest or entities where
it is not deemed to be the primary beneficiary under FIN 46R, the entities are accounted for
using the equity method of accounting (under the provisions of Emerging Issues Task Force
(EITF) No. 04-5). Accordingly, the Operating Partnerships share of the net earnings or
losses of these entities is included in consolidated net income. All significant inter-company
accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Residential properties are leased under operating leases with terms of generally one year or
less. Rental revenues from residential leases are recognized on the straight-line method over
the approximate life of the leases, which is generally one year. The recognition of rental
revenues from residential leases when earned has historically not been materially different from
rental revenues recognized on a straight-line basis.
Under the terms of residential leases, the residents of the Operating Partnerships residential
communities are obligated to reimburse the Operating Partnership for certain utility usage,
water and electricity (at selected properties), where the Operating Partnership is the primary
obligor to the public utility entity. These utility reimbursements from residents are reflected
as other property revenues in the consolidated statements of operations.
Sales and the associated gains or losses of real estate assets and for-sale condominiums are
recognized in accordance with the provisions of SFAS No. 66, Accounting for Sales of Real
Estate. For condominium conversion projects, revenues from individual condominium unit sales
are recognized upon the closing of the sale transactions (the Completed Contract Method), as
all conditions for full profit recognition have been met at that time and the conversion
construction periods are typically very short. Under SFAS No. 66, the Operating Partnership uses
the relative sales value method to allocate costs and recognize profits from condominium
conversion sales. In accordance with SFAS No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets, gains on sales of condominium units at complete community condominium
conversion projects are included in discontinued operations. For condominium conversion
projects relating to a portion of an existing apartment community, the Operating Partnership
also recognizes revenues and the associated gains under the Completed Contract Method, as
discussed herein. Since a portion of an operating community does not meet the requirements of a
component of an entity under SFAS No. 144, the revenues and gains on sales of condominium units
at partial condominium communities are included in continuing operations.
For newly developed condominiums, the Operating Partnership accounts for each project under
either the Completed Contract Method or the Percentage of Completion Method, based on a
specific evaluation of the factors specified in SFAS No. 66 and the guidance provided by EITF
06-8. The factors used to determine the appropriate accounting method are the legal commitment
of the purchaser in the real estate contract, whether 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 and the guidance provided by EITF 06-8. Under the Percentage of
Completion Method, revenues and the associated gains are recognized over the project
construction period generally based on the percentage of total project costs incurred to
estimated total project costs for each condominium unit under a binding real estate contract.
As of September 30, 2008, all newly developed condominium projects are accounted for under the
Completed Contract Method.
-26-
POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
Recently Issued and Adopted Accounting Pronouncements
SFAS No. 157, Fair Value Measurements, was issued in September 2006. The Operating
Partnership adopted SFAS No. 157 on January 1, 2008. 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 and defines it as the price that would be received to sell an asset or
paid to transfer a liability in a transaction between willing market participants. Additional
disclosures focusing on the methods used to determine fair value are also required using the
following hierarchy:
|
|
|
Level 1 Quoted prices in active markets for identical assets or liabilities that are
accessible at the measurement date. |
|
|
|
|
Level 2 Inputs other than quoted prices that are observable for the asset or liability,
either directly or indirectly. |
|
|
|
|
Level 3 Unobservable inputs for the assets or liability. |
The Operating Partnership applies SFAS No. 157 in relation to the valuation of its derivative
instrument at fair value (see note 6) and the Operating Partnerships impairment valuation
analysis related to real estate assets (see note 8). The following table presents the Operating
Partnerships real estate assets and derivative liabilities reported at fair market value and
the related level in the fair value hierarchy as defined by SFAS No. 157 used to measure those
assets and liabilities at September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements as of September 30, 2008 |
Assets (Liabilities) |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
Real estate assets, land held for development and sale |
|
$ |
44,773 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
44,773 |
|
Interest rate swap agreement |
|
|
(1,526 |
) |
|
|
|
|
|
|
(1,526 |
) |
|
|
|
|
|
|
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities including
an amendment of FASB Statement No. 115, was issued in February 2007. SFAS No. 159 gives the
Operating Partnership the irrevocable option to carry most financial assets and liabilities at
fair value, with changes in fair value recognized in earnings. The Operating Partnership
adopted SFAS No. 159 on January 1, 2008, and the adoption did not have a material impact on the
Operating Partnerships financial position and results of operations. The Operating Partnership
did not elect to record any of its financial assets and liabilities at fair value in 2008 that
were not recorded as such under existing accounting pronouncements. |
|
|
|
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, was issued in
December 2007. SFAS No. 160 requires all entities to report noncontrolling (minority) interests
in subsidiaries as equity in the consolidated financial statements. SFAS No. 160 is effective
for the Operating Partnership on January 1, 2009. The Operating Partnership is currently
evaluating the potential impact of SFAS No. 160 on the Operating Partnerships financial
position and results of operations. |
|
|
|
SFAS No. 141R, Business Combinations, was issued in December 2007. SFAS No. 141R will replace
SFAS No. 141 on the date it becomes effective. SFAS No. 141R will require 1) acquirers to
recognize all of the assets acquired and liabilities assumed in a business combination at fair
value, 2) that the acquisition date be used to determine fair value for all assets acquired and
all liabilities assumed, and 3) enhanced disclosures for the acquirer surrounding the financial
effects of the business combination. The provisions of SFAS 141R will lead to the expensing of
acquisition related transaction costs and the potential recognition of acquisition related
contingencies. SFAS No. 141R is effective for the Operating Partnership on January 1, 2009.
The Operating Partnership is currently evaluating the potential impact of SFAS No. 141R on the
Operating Partnerships financial position and results of operations. |
|
2. |
|
REAL ESTATE ACTIVITY |
|
|
|
Dispositions |
|
|
|
The Operating Partnership classifies real estate assets as held for sale after the approval of
its board of directors and after the Operating Partnership has commenced an active program to
sell the assets. At September 30, 2008, the Operating Partnership had seven apartment
communities, containing 2,365 units, and certain parcels of land classified as held for sale.
These real estate assets are reflected in the accompanying consolidated balance sheet at
$244,659, which represents the lower of their depreciated cost or fair value less costs to sell.
At September 30, 2008, the Operating Partnership also had portions of two communities being
converted to condominiums and certain completed condominium units at newly developed condominium
communities totaling $20,167 classified as for-sale condominiums on the accompanying
consolidated balance sheet. |
|
|
|
For the three and nine months ended September 30, 2008 and 2007, income from continuing
operations included net gains from condominium sales activities at newly developed and
condominium conversion projects representing portions of existing communities. In addition to
the condominium gains included in continuing operations, the Operating Partnership expensed |
-27-
POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
certain sales and marketing costs associated with pre-sale condominium communities and
condominium communities under development and such costs are included in condominium expenses in
the table below. A summary of revenues and costs and expenses of condominium activities
included in continuing operations for the three and nine months ended September 30, 2008 and
2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Condominium revenues |
|
$ |
8,633 |
|
|
$ |
30,501 |
|
|
$ |
26,981 |
|
|
$ |
61,592 |
|
Condominium costs and expenses |
|
|
(8,157 |
) |
|
|
(25,440 |
) |
|
|
(24,754 |
) |
|
|
(49,324 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on sales of condominiums, net |
|
$ |
476 |
|
|
$ |
5,061 |
|
|
$ |
2,227 |
|
|
$ |
12,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2007, gains on sales of real estate assets in continuing
operations also included a gain of $55,300 related to the Operating Partnerships transfer of
two operating apartment communities to a newly formed unconsolidated entity in which the
Operating Partnership retained a 25% non-controlling interest for aggregate proceeds of
approximately $89,351. The gain was calculated as the difference between the proceeds received
from the independent third party for its 75% interest in the unconsolidated entity and the
Operating Partnerships 75% proportionate share of the net book value of operating communities
transferred to the unconsolidated entity. The unconsolidated entity obtained mortgage financing
secured by the apartment communities totaling approximately $85,723, of which approximately
$21,431 was distributed to the Operating Partnership. Additionally, for the nine months ended
September 30, 2007, gains on sales of real estate assets in continuing operations included gains
of $3,938 on the sales of land sites in Atlanta, Georgia and Dallas, Texas.
Under SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, the
operating results of real estate assets designated as held for sale are included in discontinued
operations in the consolidated statement of operations for all periods presented. Additionally,
all gains and losses on the sale of these assets are included in discontinued operations. For
the three and nine months ended September 30, 2008, income from discontinued operations included
the results of operations of seven apartment communities classified as held for sale at
September 30, 2008 and two apartment communities through their sale dates in 2008. For the
three and nine months ended September 30, 2007, income from discontinued operations included the
results of operations of the seven apartment communities classified as held for sale at
September 30, 2008, the two apartment communities sold in 2008, a condominium conversion
community through its sell out date in February 2007 and three apartment communities sold in
2007 through their respective sale dates.
The revenues and expenses of these communities for the three and nine months ended September 30,
2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
$ |
10,896 |
|
|
$ |
13,256 |
|
|
$ |
33,398 |
|
|
$ |
39,528 |
|
Other property revenues |
|
|
415 |
|
|
|
641 |
|
|
|
1,290 |
|
|
|
1,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
11,311 |
|
|
|
13,897 |
|
|
|
34,688 |
|
|
|
41,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property operating and maintenance (exclusive of items
shown separately below) |
|
|
3,640 |
|
|
|
4,493 |
|
|
|
11,540 |
|
|
|
13,619 |
|
Depreciation |
|
|
|
|
|
|
2,264 |
|
|
|
3,623 |
|
|
|
7,641 |
|
Interest |
|
|
1,776 |
|
|
|
2,565 |
|
|
|
5,697 |
|
|
|
7,456 |
|
Minority interest in consolidated property partnerships |
|
|
241 |
|
|
|
133 |
|
|
|
475 |
|
|
|
271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
5,657 |
|
|
|
9,455 |
|
|
|
21,335 |
|
|
|
28,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued property operations |
|
$ |
5,654 |
|
|
$ |
4,442 |
|
|
$ |
13,353 |
|
|
$ |
12,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-28-
POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
For the three and nine months ended September 30, 2008, the Operating Partnership recognized net
gains in discontinued operations of $23,520 and $25,831, respectively, from the sales of two
communities, containing 143 and 250 units. These sales generated net proceeds of approximately
$37,846 and $57,279 for the three and nine months ended September 30, 2008, respectively. For
the nine months ended September 30, 2007, the Operating Partnership recognized net gains in
discontinued operations of $16,974 from the sale of one community, containing 182 units. The
sale generated net proceeds of $23,741.
Subsequent to September 30, 2008, the Operating Partnership sold one community, containing 494
units, for gross proceeds of approximately $52,750. As a result of this sale, the Operating
Partnership will record a gain of approximately $37 million in the fourth quarter. Net proceeds
from the sale were primarily invested in cash equivalents.
For the three and nine months ended September 30, 2007, the Operating Partnership recorded
additional condominium gains of $311 resulting from the reduction of unused warranty accruals
from condominium communities sold out in the prior year. For the nine months ended September
30, 2007, gains on sales of real estate assets included in discontinued operations also included
net gains from condominium sales at one condominium conversion community that sold out in
February 2007. A summary of revenues and costs and expenses of condominium activities included
in discontinued operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, 2007 |
|
|
September 30, 2007 |
|
Condominium revenues |
|
$ |
|
|
|
$ |
560 |
|
Condominium costs and expenses |
|
|
311 |
|
|
|
(70 |
) |
|
|
|
|
|
|
|
Gains on condominium sales |
|
$ |
311 |
|
|
$ |
490 |
|
|
|
|
|
|
|
|
3. |
|
INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ENTITIES |
|
|
|
At September 30, 2008, the Operating Partnership holds investments in various individual limited
liability companies (the Property LLCs) with institutional investors that own apartment
communities. The Operating Partnership holds a 25% to 35% equity interest in these Property
LLCs. The Operating Partnership and its joint venture partner also hold an approximate pro-rata
48% interest in a Property LLC that is in the process of constructing a mixed-use development,
consisting of 129 luxury condominium units, sponsored by the Operating Partnership and its
partner, and Class A office space, sponsored by two additional independent investors. The
Operating Partnership also has a 50% interest in another Property LLC that holds land for
future development. In 2007, another Property LLC completed the sell-out of a condominium
conversion community, initially consisting of 121 units. |
|
|
|
In 2007, the Operating Partnerships investment in the 25% owned Property LLC resulted from the
transfer of three previously owned apartment communities to the Property LLC co-owned with an
institutional investor. The assets, liabilities and members equity of this Property LLC were
recorded at fair value based on agreed-upon amounts contributed to the Property LLC. At
September 30, 2008 and December 31, 2007, the Operating Partnerships investment in the 25%
owned Property LLC reflects a credit investment of $14,048 and $13,688, respectively, resulting
primarily from distributions of financing proceeds in excess of the Operating Partnerships
historical cost investment. The credit investment is reflected in consolidated liabilities on
the Operating Partnerships consolidated balance sheet. |
|
|
|
The Operating Partnership accounts for its investments in these Property LLCs using the equity
method of accounting. At September 30, 2008 and
December 31, 2007, the Operating Partnerships investment in these
Property LLCs totaled $40,874 and $23,036, respectively, excluding the credit investment discussed above. The excess of
the Operating Partnerships investment over its equity in the underlying net assets of certain
Property LLCs was approximately $6,073 at September 30, 2008. The excess investment related to
Property LLCs owning apartment communities is being amortized as a reduction to earnings on a
straight-line basis over the lives of the related assets. The Operating Partnership provides
real estate services (development, construction and property management) to the Property LLCs
for which it earns fees. |
|
|
|
The operating results of the Operating Partnership include its allocable share of net income
from the investments in the Property LLCs. A summary of financial information for the Property
LLCs in the aggregate was as follows: |
-29-
POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
Balance Sheet Data |
|
2008 |
|
|
2007 |
|
Real estate assets, net of accumulated depreciation of
$19,942 and $15,204, respectively |
|
$ |
381,298 |
|
|
$ |
325,705 |
|
Cash and other |
|
|
18,498 |
|
|
|
7,254 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
399,796 |
|
|
$ |
332,959 |
|
|
|
|
|
|
|
|
Mortgage/construction notes payable |
|
$ |
279,886 |
|
|
$ |
214,549 |
|
Other liabilities |
|
|
9,085 |
|
|
|
5,541 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
288,971 |
|
|
|
220,090 |
|
Members equity |
|
|
110,825 |
|
|
|
112,869 |
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
399,796 |
|
|
$ |
332,959 |
|
|
|
|
|
|
|
|
Operating Partnerships equity investment in Property
LLCs |
|
$ |
26,826 |
|
|
$ |
9,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
Income Statement Data |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
$ |
6,872 |
|
|
$ |
5,450 |
|
|
$ |
20,359 |
|
|
$ |
12,406 |
|
Other property revenues |
|
|
449 |
|
|
|
372 |
|
|
|
1,332 |
|
|
|
851 |
|
Other |
|
|
11 |
|
|
|
45 |
|
|
|
47 |
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
7,332 |
|
|
|
5,867 |
|
|
|
21,738 |
|
|
|
13,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating and maintenance |
|
|
3,011 |
|
|
|
2,279 |
|
|
|
8,646 |
|
|
|
4,837 |
|
Depreciation and amortization |
|
|
1,753 |
|
|
|
1,920 |
|
|
|
5,989 |
|
|
|
3,861 |
|
Interest |
|
|
2,802 |
|
|
|
1,921 |
|
|
|
7,801 |
|
|
|
3,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
7,566 |
|
|
|
6,120 |
|
|
|
22,436 |
|
|
|
12,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(234 |
) |
|
|
(253 |
) |
|
|
(698 |
) |
|
|
700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
3 |
|
|
|
4 |
|
|
|
1 |
|
|
|
34 |
|
Gains on sales of real estate assets, net |
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
3 |
|
|
|
45 |
|
|
|
1 |
|
|
|
851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(231 |
) |
|
$ |
(208 |
) |
|
$ |
(697 |
) |
|
$ |
1,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Partnerships share of net income |
|
$ |
260 |
|
|
$ |
402 |
|
|
$ |
1,081 |
|
|
$ |
1,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2007, gains (losses) on real estate assets
represent net gains (losses) from condominium sales at the condominium conversion community held
by a Property LLC that completed its sell out in 2007.
At September 30, 2008, mortgage/construction notes payable includes a $50,500 mortgage note that
bears interest at 5.82%, requires monthly interest only payments and matures in 2013. The note
is prepayable without penalty in September 2011. Another mortgage note payable totaling $29,272
bears interest at 5.83%, requires monthly interest only payments and matures in 2013. The note
is prepayable without penalty in September 2011. These mortgage notes refinanced existing
mortgage indebtedness that carried interest rates of 4.13% and 4.04%,
respectively.
Three additional mortgage notes were entered into in conjunction with the formation of the 25%
owned Property LLC in 2007. Two notes total $85,723, bear interest at 5.63%, require interest
only payments and mature in 2017. The third mortgage note totals $41,000, bears interest at
5.71%, requires interest only payments, and matures in 2017.
In 2007, the Property LLC constructing the mixed-use development and a related Property LLC
holding land for future development entered into a construction loan facility with an aggregate
capacity of $187,128. At September 30, 2008, the construction loan had an outstanding balance
of $73,390, bears interest at LIBOR plus 1.35% and matures in 2011. Under the terms of the
construction loan facility, the Operating Partnership and its equity partner have jointly and
severally guaranteed approximately $25,313 of the construction loan held at the unconsolidated
Property LLC attributable to the condominium portion of the project as well as certain debt
service payments of the condominium portion of the loan held at the unconsolidated Property LLC
not to exceed approximately $6,153. Finally, all of the equity owners of the project at the
unconsolidated Property LLC, including the Operating Partnership,
have jointly and severally guaranteed the completion
of the first building of the project.
-30-
POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
|
|
In periods prior to the third quarter of 2008, the Operating Partnership held a 50% interest in
an unconsolidated limited liability company (the LLC), which now holds the approximate
pro-rata 48% interest in the Property LLC constructing condominiums as part of a mixed-use
development with other investors as discussed above. In the third quarter of 2008, the
Operating Partnership invested additional equity of $15,500 in the
LLC, for which it received a preferred equity interest and which resulted in the
Operating Partnership obtaining a controlling financial interest in the LLC. As such, the
Operating Partnership consolidated the LLC at September 30, 2008. As stated above, the LLCs
principal asset is its $30,141 investment in the Property LLC, which is included in investments
in and advances to unconsolidated entities on the Operating Partnerships consolidated balance
sheet. In conjunction with the Operating Partnerships additional equity investment in the LLC,
the LLC entered into a licensing and branding arrangement with a third party. This arrangement
provides for the payment of a guaranteed licensing fee on the sale of the condominium units.
The payment of the licensing fee will be paid from the proceeds of condominium sales at the LLC. |
|
4. |
|
INDEBTEDNESS |
|
|
|
At September 30, 2008 and December 31, 2007, the Operating Partnerships indebtedness consisted
of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment |
|
|
|
|
|
|
|
Maturity |
|
September 30, |
|
|
December 31, |
|
Description |
|
Terms |
|
Interest Rate |
|
|
|
Date |
|
2008 |
|
|
2007 |
|
Senior Unsecured Notes |
|
Int. |
|
|
5.13% - 7.70% |
(1) |
|
|
2010-2013 |
|
$ |
535,000 |
|
|
$ |
535,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured Lines of Credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicated Line of Credit |
|
N/A |
|
|
LIBOR + 0.575% |
(2) |
|
|
2010 |
|
|
100,000 |
|
|
|
245,000 |
|
Cash Management Line |
|
N/A |
|
LIBOR + 0.575% |
|
|
|
2010 |
|
|
25,882 |
|
|
|
12,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,882 |
|
|
|
257,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA |
|
Prin. and Int. |
|
Remarketed rate |
(3) |
|
|
2029 |
|
|
92,275 |
|
|
|
94,000 |
|
Other |
|
Prin. and Int. |
|
|
4.27% - 6.50% |
(4) |
|
|
2009-2015 |
|
|
290,261 |
|
|
|
172,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
382,536 |
|
|
|
266,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
$ |
1,043,418 |
|
|
$ |
1,059,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Of the Operating Partnerships senior unsecured notes,
notes for approximately $185,000 bearing interest
at 7.7% mature in 2010. The remaining notes mature between 2011 and 2013. |
|
(2) |
|
Represents stated rate. At September 30, 2008, the weighted average interest
rate was 3.48%. |
|
(3) |
|
FNMA credit enhanced taxable bonds accrue interest at a variable remarketed
rate established weekly. Prior to the third quarter of 2008, the interest was
fixed at 6.15%, inclusive if credit enhancement and other fees, through an
interest rate swap arrangement. Due to the credit market instability in the third
quarter of 2008, the interest rate swap became ineffective (see note 6) and the
weighted average effective interest costs under the debt arrangement averaged
approximately 6.7% for the third quarter. Until credit markets stabilize,
interest costs may continue to fluctuate and may be higher than the effective
6.15% fixed rate paid in prior periods. The interest rate
swap arrangement expires on July 31, 2009 at which time the Operating Partnership will be required
to replace the swap with a new interest rate hedge arrangement with a 5-year term.
As of that same date, the Operating Partnership also has the option of pre-paying
the loan. |
|
(4) |
|
Of the Operating Partnerships secured notes, notes for
approximately $39,645 bearing interest at 6.5%
and $34,108 bearing interest at 4.3% mature in 2009. The remaining notes mature between 2011 and
2015. |
Debt maturities
The aggregate maturities of the Operating Partnerships indebtedness are as follows:
|
|
|
|
|
Remainder of 2008 |
|
$ |
965 |
|
2009 |
|
|
76,618 |
|
2010 |
|
|
314,510 |
(1) |
2011 |
|
|
141,431 |
|
2012 |
|
|
103,296 |
|
Thereafter |
|
|
406,598 |
|
|
|
|
|
|
|
$ |
1,043,418 |
|
|
|
|
|
|
|
|
(1) |
|
Includes outstanding balances on lines of
credit totaling $125,882. |
-31-
POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
Debt issuances
In January 2008, the Operating Partnership closed a $120,000 secured, fixed rate mortgage note
payable. The note bears interest at 4.88%, requires interest only payments and matures in 2015.
The note contains an automatic one year extension under which the interest rate converts to a
variable rate, as defined.
In October 2008, the Operating Partnership closed six cross-collateralized secured mortgage
notes payable. The mortgage notes have an aggregate principle amount of $184,683, require
fixed, interest-only payments at 6.09% and mature in 2014. The mortgage notes are prepayable
without penalty beginning after October 2012. Net financing proceeds were used primarily to pay
down the Companys revolving lines of credit, with the remainder invested in cash equivalents.
Unsecured Lines of Credit
At September 30, 2008, the Operating Partnership utilizes a $600,000 syndicated unsecured
revolving line of credit (the Syndicated Line) that matures in April 2010 for its short-term
financing needs. The Syndicated Line may be extended for an additional year through April 2011.
The Syndicated Line currently has a stated interest rate of LIBOR plus 0.575% or the prime rate
and was provided by a syndicate of 17 banks led by Wachovia Bank, N.A. and JP Morgan Securities,
Inc. Additionally, the Syndicated Line requires the payment of annual facility fees currently
equal to 0.15% of the aggregate loan commitment. The Syndicated Line provides for the interest
rate and facility fee rate to be adjusted up or down based on changes in the credit ratings on
the Operating Partnerships senior unsecured debt. The rates under the Syndicated Line are
based on the higher of the Operating Partnerships unsecured debt ratings in instances where the
Operating Partnership has split unsecured debt ratings. The Syndicated Line also includes a
competitive bid option for short-term funds up to 50% of the loan commitment at rates generally
below the stated line rate. The credit agreement for the Syndicated Line contains customary
restrictions, representations, covenants and events of default, including fixed charge coverage
and maximum leverage ratios. The Syndicated Line also restricts the amount of capital the
Operating Partnership can invest in specific categories of assets, such as improved land,
properties under construction, condominium properties, non-multifamily properties, debt or
equity securities, notes receivable and unconsolidated affiliates. At September 30, 2008, the
Operating Partnership had issued letters of credit to third parties totaling $3,692 under this
facility.
Additionally, at September 30, 2008, the Operating Partnership had a $30,000 unsecured line of
credit with Wachovia Bank, N.A. (the Cash Management Line). The Cash Management Line matures
in April 2010 and carries pricing and terms, including debt covenants, substantially consistent
with the Syndicated Line.
-32-
POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
5. |
|
PARTNERS EQUITY |
|
|
|
Computations of Earnings (Loss) Per Common Unit |
|
|
|
For the three and nine months ended September 30, 2008 and 2007, a reconciliation of the
numerator and denominator used in the computation of basic and diluted income (loss) from
continuing operations per common unit is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Income (loss) from continuing operations available to
common unitholders (numerator): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(1,900 |
) |
|
$ |
6,403 |
|
|
$ |
(34,493 |
) |
|
$ |
70,939 |
|
Less: Preferred unit distributions |
|
|
(1,909 |
) |
|
|
(1,909 |
) |
|
|
(5,728 |
) |
|
|
(5,728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations available to
common unitholders |
|
$ |
(3,809 |
) |
|
$ |
4,494 |
|
|
$ |
(40,221 |
) |
|
$ |
65,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common units (denominator): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding basic |
|
|
44,340 |
|
|
|
44,133 |
|
|
|
44,306 |
|
|
|
44,087 |
|
Dilutive units from stock options and awards (1) |
|
|
|
|
|
|
576 |
|
|
|
|
|
|
|
714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding diluted (1) |
|
|
44,340 |
|
|
|
44,709 |
|
|
|
44,306 |
|
|
|
44,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the three and nine months ended September 30, 2008, the potential dilution
from the Companys outstanding stock options to purchase 135 and 275 shares,
respectively, were antidilutive to the loss from continuing operations per unit
calculation. As such, the amounts were excluded from weighted average units for
the periods. |
|
|
For the three and nine months ended September 30, 2008 and 2007, stock options to purchase 2,412
and 216 shares of common stock, respectively, and 2,412 and 194, respectively, were excluded
from the computation of diluted earnings (loss) per common unit as these stock options and
awards were antidilutive. |
|
6. |
|
DERIVATIVE FINANCIAL INSTRUMENTS |
|
|
|
The Operating Partnership adopted the provisions of SFAS No. 157 on January 1, 2008. To comply
with the provisions of SFAS No. 157, the Operating Partnerships fair value measurement of its
derivative instrument at September 30, 2008 uses Level 2 observable inputs that incorporate
credit valuation adjustments to appropriately reflect both its risk of nonperformance and the
counterpartys risk of nonperformance. |
|
|
|
At September 30, 2008, the Operating Partnership had an outstanding interest rate swap agreement
with a notional value of approximately $92,145 with a maturity date in 2009. The interest rate
swap agreement is included on the accompanying consolidated balance sheet at fair value,
representing a liability of $1,526. During the third quarter of 2008, the interest rate swap
arrangement, previously accounted for as a cash flow hedge, became ineffective under generally
accepted accounting principles (SFAS No. 133, as amended). As a result, the gross increase in
the market value of the interest rate swap arrangement for the three months ended September 30,
2008 of $663 was recognized in other income in the consolidated statement of operations. In
addition, under SFAS No. 133, as amended, the Operating Partnership is required to amortize into
expense the cumulative unrecognized loss on the interest rate swap of $2,189, previously
included in partners equity, over the remaining life of the swap through 2009. Total
amortization expense related to this swap was $508 for the three and nine months ended September
30, 2008. |
|
|
|
In prior years, a previous interest rate swap arrangement, accounted for as a cash flow hedge,
became ineffective under generally accepted accounting principles (SFAS No. 133, as amended).
Under SFAS No. 133, as amended, the Operating Partnership is required to amortize into interest
expense the cumulative unrecognized loss on the terminated interest rate swap arrangement of
$4,021, included in partners equity, over the remaining original life of the swap through 2009.
Total amortization expense related to this swap was $281 and $280, respectively, for the three
months ended and $843 and $842, respectively, for the nine months ended September 30, 2008 and
2007. |
-33-
POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
On February 1, 2008, a $28,495 interest rate cap arrangement expired on its maturity date with
no change in value from December 31, 2007.
A summary of comprehensive income (loss) for the three and nine months ended September 30, 2008
and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income (loss) |
|
$ |
27,274 |
|
|
$ |
11,156 |
|
|
$ |
4,691 |
|
|
$ |
100,826 |
|
Change in derivatives (1) |
|
|
(393 |
) |
|
|
(901 |
) |
|
|
1,387 |
|
|
|
227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
26,881 |
|
|
$ |
10,255 |
|
|
$ |
6,078 |
|
|
$ |
101,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the three and nine months ended September 30, 2008 and 2007, the change in
derivatives balance includes an adjustment of $789 and $280, respectively, and
$1,351 and $842, respectively, for amortized swap costs included in net income. |
7. |
|
SEGMENT INFORMATION |
|
|
|
Segment Description |
|
|
|
In accordance with SFAS No. 131, Disclosure About the Segments of an Enterprise and Related
Information, the Operating Partnership presents segment information based on the way that
management organizes the segments within the enterprise for making operating decisions and
assessing performance. The segment information is prepared on the same basis as the internally
reported information used by the Operating Partnerships chief operating decision makers to
manage the business. |
|
|
|
The Operating Partnerships chief operating decision makers focus on the Operating Partnerships
primary sources of income from apartment community rental operations. Apartment community
rental operations are generally broken down into four segments based on the various stages in
the apartment community ownership lifecycle. These segments are described below. All commercial
properties and other ancillary service and support operations are combined in the line item
other in the accompanying segment information. The segment information presented below
reflects the segment categories based on the lifecycle status of each community as of January 1,
2007. The segment information for the three and nine months ended September 30, 2007 has been
adjusted due to the restatement impact of reclassifying the operating results of the assets
designated as held for sale or sold subsequent to September 30, 2007 to discontinued operations
under SFAS No. 144 (see note 2). |
|
|
|
Fully stabilized communities those apartment communities which have been stabilized
(the earlier of the point at which a property reaches 95% occupancy or one year after
completion of construction) for both the current and prior year. |
|
|
|
|
Communities stabilized during 2007 communities which reached stabilized occupancy in
the prior year. |
|
|
|
|
Development, rehabilitation and lease-up communities those apartment communities
under development, rehabilitation and lease-up during the period. |
|
|
|
|
Condominium conversion and other communities those portions of existing apartment
communities being converted into condominiums and other communities converted to joint
venture ownership that are reflected in continuing operations. |
|
|
|
|
Acquired communities those communities acquired in the current or prior year. |
Segment Performance Measure
Management uses contribution to consolidated property net operating income (NOI) as the
performance measure for its operating segments. The Operating Partnership uses net operating
income, including net operating income of stabilized communities, as an operating measure. Net
operating income is defined as rental and other property revenue from real estate operations
less total property and maintenance expenses from real estate operations (excluding depreciation
and amortization). The Operating Partnership believes that net operating income is an important
supplemental measure of operating performance for a REITs 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 generally incurred at the
corporate level. This measure is particularly useful, in the opinion of the Operating
Partnership, in evaluating the performance of operating segment groupings and individual
properties. Additionally, the Operating Partnership believes that net operating income, as
defined, is a widely accepted
-34-
POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
measure of comparative operating performance in the real estate investment community. The
Operating Partnership believes that the line on the Operating Partnerships consolidated
statement of operations entitled net income is the most directly comparable GAAP measure to
net operating income.
Segment Information
The following table reflects each segments contribution to consolidated revenues and NOI
together with a reconciliation of segment contribution to property NOI to consolidated net
income (loss) for the three and nine months ended September 30, 2008 and 2007. Additionally,
substantially all of the Operating Partnerships assets relate to the Operating Partnerships
property rental operations. Asset cost, depreciation and amortization by segment are not
presented because such information at the segment level is not reported internally.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully stabilized communities |
|
$ |
52,037 |
|
|
$ |
51,588 |
|
|
$ |
154,555 |
|
|
$ |
151,377 |
|
Communities stabilized during 2007 |
|
|
2,749 |
|
|
|
2,261 |
|
|
|
7,967 |
|
|
|
5,094 |
|
Development, rehabilitation and lease-up communities |
|
|
5,067 |
|
|
|
4,103 |
|
|
|
13,905 |
|
|
|
11,901 |
|
Condominium conversion and other communities |
|
|
160 |
|
|
|
1,625 |
|
|
|
549 |
|
|
|
8,409 |
|
Acquired communities |
|
|
1,363 |
|
|
|
830 |
|
|
|
4,040 |
|
|
|
830 |
|
Other property segments |
|
|
6,206 |
|
|
|
5,832 |
|
|
|
18,421 |
|
|
|
17,216 |
|
Other |
|
|
261 |
|
|
|
171 |
|
|
|
735 |
|
|
|
416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenues |
|
$ |
67,843 |
|
|
$ |
66,410 |
|
|
$ |
200,172 |
|
|
$ |
195,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution to Property Net Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully stabilized communities |
|
$ |
31,189 |
|
|
$ |
30,812 |
|
|
$ |
92,103 |
|
|
$ |
91,069 |
|
Communities stabilized during 2007 |
|
|
1,716 |
|
|
|
1,290 |
|
|
|
4,767 |
|
|
|
2,084 |
|
Development, rehabilitation and lease-up communities |
|
|
2,038 |
|
|
|
2,082 |
|
|
|
5,563 |
|
|
|
5,992 |
|
Condominium conversion and other communities |
|
|
96 |
|
|
|
851 |
|
|
|
333 |
|
|
|
4,706 |
|
Acquired communities |
|
|
781 |
|
|
|
473 |
|
|
|
2,165 |
|
|
|
473 |
|
Other property segments, including corporate management expenses |
|
|
(783 |
) |
|
|
(1,438 |
) |
|
|
(4,051 |
) |
|
|
(5,282 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated property net operating income |
|
|
35,037 |
|
|
|
34,070 |
|
|
|
100,880 |
|
|
|
99,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
96 |
|
|
|
189 |
|
|
|
367 |
|
|
|
652 |
|
Other revenues |
|
|
261 |
|
|
|
171 |
|
|
|
735 |
|
|
|
416 |
|
Minority interest in consolidated property partnerships |
|
|
52 |
|
|
|
(452 |
) |
|
|
113 |
|
|
|
(1,146 |
) |
Depreciation |
|
|
(14,979 |
) |
|
|
(14,522 |
) |
|
|
(43,628 |
) |
|
|
(43,248 |
) |
Interest expense |
|
|
(11,471 |
) |
|
|
(10,658 |
) |
|
|
(31,739 |
) |
|
|
(32,566 |
) |
Amortization of deferred financing costs |
|
|
(869 |
) |
|
|
(828 |
) |
|
|
(2,579 |
) |
|
|
(2,469 |
) |
General and administrative |
|
|
(4,461 |
) |
|
|
(4,761 |
) |
|
|
(15,265 |
) |
|
|
(16,168 |
) |
Investment and development |
|
|
(1,834 |
) |
|
|
(2,007 |
) |
|
|
(4,648 |
) |
|
|
(5,512 |
) |
Strategic review costs |
|
|
|
|
|
|
|
|
|
|
(8,161 |
) |
|
|
|
|
Impairment, severance and other charges |
|
|
(5,002 |
) |
|
|
|
|
|
|
(34,302 |
) |
|
|
|
|
Gains on sales of real estate assets, net |
|
|
476 |
|
|
|
5,061 |
|
|
|
2,227 |
|
|
|
71,506 |
|
Equity in income of unconsolidated real estate entities |
|
|
260 |
|
|
|
402 |
|
|
|
1,081 |
|
|
|
1,216 |
|
Other income (expense), net |
|
|
534 |
|
|
|
(262 |
) |
|
|
426 |
|
|
|
(784 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(1,900 |
) |
|
|
6,403 |
|
|
|
(34,493 |
) |
|
|
70,939 |
|
Income from discontinued operations |
|
|
29,174 |
|
|
|
4,753 |
|
|
|
39,184 |
|
|
|
29,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
27,274 |
|
|
$ |
11,156 |
|
|
$ |
4,691 |
|
|
$ |
100,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. |
|
IMPAIRMENT, SEVERANCE AND OTHER COSTS |
|
|
|
After an evaluation of its development pipeline in light of difficult market conditions, the
Operating Partnership recorded impairment charges of approximately $28,947 in the second quarter
of 2008. The impairment charges relate to the substantial cessation of current development
activities associated with four land parcels in pre-development which were written down to their
estimated fair market values, as well as the write-off of capitalized pursuit costs associated
with certain abandoned projects. Fair
|
-35-
POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
market value for the assets recorded at fair value in the second quarter of 2008 was determined
using Level 3 unobservable inputs, such as estimated cash flows, market capitalization rates and
market internal rates of return.
Additionally, in the second quarter of 2008, the Operating Partnership initiated a management
and staff workforce reduction resulting in the elimination of 40 employment positions and
severance charges of approximately $2,238 and $2,591 for the three and nine months ended
September 30, 2008, respectively. The impairment and severance charges reflected managements decision to
reduce the size of its workforce and lower overhead expenses in response in part to its decision
to reduce the number of markets in which the Operating Partnership operates, to sell additional
operating assets and to focus its development strategy on fewer projects in the near term. The
Operating Partnership may also record additional severance charges in the fourth quarter of 2008
or in future periods, depending on market conditions and the Operating Partnerships business
plans.
For the three and nine months ended September 30, 2008, the Operating Partnership recorded
estimated casualty losses of approximately $2,764 related to damage sustained at its Houston,
Texas properties as a result of Hurricane Ike. The Company currently estimates that these
losses will be below its insured wind storm deductible.
In prior years, the Operating Partnership recorded severance charges associated with the
departure of certain executive officers of the Operating Partnership. Under certain of these
arrangements, the Operating Partnership is required to make certain payments and provide
specified benefits through 2013 and 2016. The following table summarizes the activity relating
to aggregate net severance charges for such executive officers for the nine months ended
September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Accrued severance charges, beginning of period |
|
$ |
11,215 |
|
|
$ |
12,832 |
|
Severance charges |
|
|
353 |
|
|
|
283 |
|
Payments for period |
|
|
(2,557 |
) |
|
|
(2,129 |
) |
Interest accretion |
|
|
549 |
|
|
|
555 |
|
|
|
|
|
|
|
|
Accrued severance charges, end of period |
|
$ |
9,560 |
|
|
$ |
11,541 |
|
|
|
|
|
|
|
|
9. |
|
SUPPLEMENTAL CASH FLOW INFORMATION |
|
|
|
Interest paid (including capitalized amounts of $9,546 and $8,659 for the nine months ended
September 30, 2008 and 2007, respectively), aggregated $37,896 and $40,799 for the nine months
ended September 30, 2008 and 2007, respectively. |
|
|
|
For the nine months ended September 30, 2008 and 2007, the Operating Partnership and the
Operating Partnerships taxable REIT subsidiaries made income tax payments to federal and state
taxing authorities totaling $1,700 and $1,575, respectively. |
|
|
|
Non-cash investing and financing activities for the nine months ended September 30, 2008 and
2007 were as follows: |
|
|
|
For the nine months ended September 30, 2008 and 2007, the Operating Partnership amortized
approximately $1,351 and $842, respectively, of accumulated other comprehensive non-cash losses
into earnings related to an interest rate swap derivative financial instrument (see note 6).
Other than the amortization discussed herein, for the nine months ended September 30, 2008, the
Operating Partnerships derivative financial instruments, accounted for as cash flow hedges,
increased in value by $663, causing a decrease in accounts payable and accrued expenses and a
corresponding increase in the Operating Partnerships other income, as this cash flow hedge
became ineffective during the quarter. Other than the amortization
discussed herein, for the nine months ended September 30, 2008, the
Operating Partnerships derivative financial instruments,
accounted for as cash flow hedges, increased in value causing a
decrease in accounts payable and accrued expenses and a corresponding
decrease in partners equity of $35.
Other than the amortization discussed herein,
for the nine months ended September 30, 2007, the
Operating Partnerships derivative financial instruments accounted for as cash flow hedges
decreased in value causing a decrease in accounts payable and accrued expenses and a
corresponding decrease in partners equity of $616. |
|
|
|
The Operating Partnership committed to distribute $19,990 and $21,840 for the three months ended
September 30, 2008 and 2007, respectively. |
|
|
|
For the nine months ended September 30, 2008 and 2007, the Company issued common shares for
director compensation, totaling $552 and $394, respectively. These stock issuances were
non-cash transactions. The Operating Partnership bears the compensation costs associated with
the Companys compensation plans. As such, the Operating Partnership issued common units to the
Company in amounts equal to the above. |
-36-
10. EQUITY-BASED COMPENSATION PLANS
Equity Compensation Plans
As the primary operating subsidiary of the Company, the Operating Partnership participates in
and bears the compensation expenses associated with the Companys stock-based compensation
plans. The information discussed below relating to the Companys stock-based compensation plans
is also applicable for the Operating Partnership.
Incentive Stock Plans
Incentive
stock awards are granted under the Companys 2003 Incentive
Stock Plan, as amended and restated in
October 2008 (the 2003 Stock Plan). As of December 31, 2007, prior to the amendment of the
plan, there were 1,869 shares available for issuance under the 2003 Stock Plan. The plan was
amended in October 2008 to increase the number of shares of the Companys common stock reserved
for issuance and available for grant by 1,600 shares, so that 3,469 shares of common stock were
reserved for issuance as of January 1, 2008. Of this amount, stock grants count against the
total shares available under the 2003 Stock Plan as 2.7 shares for every one share issued on and
after January 1, 2008, while options (and stock appreciation
rights (SAR) settled in shares) count
against the total shares available as one share for every one share issued on the exercise of an
option (or SAR) on and after January 1, 2008. The exercise price of each option granted under the 2003
Stock Plan may not be less than the market price of the Companys common stock on the date of
the option grant and all options may have a maximum life of ten years. Participants receiving
restricted stock grants are generally eligible to vote such shares and receive dividends on such
shares. Substantially all stock option and restricted stock grants are subject to annual
vesting provisions (generally three to five years) as determined by the compensation committee
overseeing the 2003 Stock Plan. At September 30, 2008, stock options outstanding under the 2003
Stock Plan and the Companys previous stock plan totaled 2,412.
Compensation costs for stock options have been estimated on the grant date using the
Black-Scholes option-pricing method. The Company did not grant any stock options for the nine
months ended September 30, 2008. For options granted during the nine months ended September 30,
2007, the weighted average assumptions used in the Black-Scholes option-pricing model were
dividend yield of 3.8%, expected volatility of 18.1%, risk-free interest rate of 4.8% and
expected option term of 5.0 years.
The Companys assumptions were derived from the methodologies discussed herein. The expected
dividend yield reflects the Companys current historical yield, which is expected to approximate
the future yield. Expected volatility was based on the historical volatility of the Companys
common stock. The risk-free interest rate for the expected life of the options was based on the
implied yields on the U.S. Treasury yield curve. The weighted average expected option term was
based on the Companys historical data for prior period stock option exercise and forfeiture
activity.
For the nine months ended September 30, 2008 and 2007, the Company granted stock options to
purchase zero and 199 shares of Company common stock, respectively, to Company officers and
directors, of which zero and 28 shares, respectively, were granted to the Companys
non-executive chairman of the board. The Company recorded compensation expense related to stock
options of $376 and $404 for the three months ended and $1,042 and $1,162 for the nine months
ended September 30, 2008 and 2007, respectively, under the fair value method. Upon the exercise
of stock options, the Company issues shares of common stock from treasury shares or, to the
extent treasury shares are not available, from authorized common shares.
A summary of stock option activity under all plans for the nine months ended September 30, 2008
and 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Weighted Average |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Shares |
|
|
Exercise Price |
|
Options outstanding, beginning of period |
|
|
2,455 |
|
|
$ |
34 |
|
|
|
2,375 |
|
|
$ |
33 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
199 |
|
|
|
48 |
|
Exercised |
|
|
(39 |
) |
|
|
37 |
|
|
|
(108 |
) |
|
|
36 |
|
Forfeited |
|
|
(4 |
) |
|
|
32 |
|
|
|
(8 |
) |
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, end of period |
|
|
2,412 |
|
|
|
34 |
|
|
|
2,458 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, end of period |
|
|
2,164 |
|
|
|
33 |
|
|
|
1,774 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of options granted during the period |
|
$ |
|
|
|
|
|
|
|
$ |
7.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008, there was $751 of unrecognized compensation cost related to unvested
stock options. This cost is expected to be recognized over a weighted-average period of 0.8
years. The total intrinsic value of stock options exercised during
-37-
POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
the nine months ended September 30, 2008 and 2007 was $194 and $1,395, respectively. The
aggregate intrinsic values of stock options outstanding, exercisable and expected to vest at
September 30, 2008 was $1,248. The weighted average remaining contractual lives of stock
options outstanding, exercisable and expected to vest at September 30, 2008 were 4.6, 4.2 and
4.6 years, respectively. Stock options expected to vest at September 30, 2008 totaled 2,398 at
a weighted average exercise price of approximately $33.91.
At September 30, 2008, the Company had separated its outstanding options into two ranges based
on exercise prices. There were 1,379 options outstanding with exercise prices ranging from
$23.90 to $36.13. These options have a weighted average exercise price of $29.17 and a weighted
average remaining contractual life of 4.4 years. Of these outstanding options, 1,369 were
exercisable at September 30, 2008 at a weighted average exercise price of $29.17. In addition,
there were 1,033 options outstanding with exercise prices ranging from $36.47 to $48.00. These
options had a weighted average exercise price of $40.37 and a weighted average remaining
contractual life of 4.8 years. Of these outstanding options, 795 were exercisable at September
30, 2008 at a weighted average exercise price of $39.09.
For the nine months ended September 30, 2008 and 2007, the Company granted 78 and 49 shares of
restricted stock, respectively, to Company officers and directors, of which 9 and 4 shares,
respectively, were granted to the Companys non-executive chairman of the board. The restricted
share grants generally vest ratably over three to five year periods. The weighted average grant
date fair value for the restricted shares for the nine months ended September 30, 2008 and 2007
was $42.25 and $48.15, respectively, per share. The total value of the restricted share grants
for the nine months ended September 30, 2008 and 2007 was $3,308 and $2,371, respectively. The
compensation cost is amortized ratably into compensation expense over the applicable vesting
periods. Total compensation expense relating to the restricted stock was $821 and $644 for the
three months ended and $2,395 and $1,748 for the nine months ended September 30, 2008 and 2007,
respectively.
A summary of the activity related to the Companys restricted stock for the nine months ended
September 30, 2008 and 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant-Date |
|
|
|
|
|
|
Grant-Date |
|
|
|
Shares |
|
|
Fair Value |
|
|
Shares |
|
|
Fair Value |
|
Unvested shares, beginning or period |
|
|
119 |
|
|
$ |
35 |
|
|
|
125 |
|
|
$ |
31 |
|
Granted |
|
|
78 |
|
|
|
42 |
|
|
|
49 |
|
|
|
48 |
|
Vested |
|
|
(26 |
) |
|
|
31 |
|
|
|
(23 |
) |
|
|
28 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested shares, end of period |
|
|
171 |
|
|
|
39 |
|
|
|
150 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008, there was $4,438 of unrecognized compensation cost related to restricted
stock. This cost is expected to be recognized over a weighted average period of 2.0 years. The
total intrinsic value of restricted shares vested for the nine months ended September 30, 2008
and 2007 was $790 and $1,185, respectively. |
|
|
|
Employee Stock Purchase Plan |
|
|
|
The Company maintains an Employee Stock Purchase Plan (the ESPP) under a plan approved by
Company shareholders in 2005, and the maximum number of shares issuable is 300. The purchase
price of shares of common stock under the ESPP is equal to 85% of the lesser of the closing
price per share of common stock on the first or last day of the trading period, as defined. The
Company records the aggregate cost of the ESPP (generally the 15% discount on the share
purchases) as a period expense. Total compensation expense relating to the ESPP was $36 and $40
for the three months ended and $113 and $162 for the nine months ended September 30, 2008 and
2007, respectively. |
|
11. |
|
INCOME TAXES |
|
|
|
Income or losses of the Operating Partnership are allocated to the partners of the Operating
Partnership for inclusion in their respective income tax returns. Accordingly, no provisions or
benefit for income taxes has been made in the accompanying financial statements. The Company
has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the
Code). In order for the Company to qualify as a REIT, it must distribute 90% of its REIT
taxable income, as defined in the Code, to its unitholders and satisfy certain other
organizational and operating requirements. The Operating Partnership intends to make sufficient
cash distributions to the Company to enable it to meet its annual REIT distribution
requirements. |
-38-
POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
In the preparation of income tax returns in federal and state jurisdictions, the Operating
Partnership and its taxable REIT subsidiaries assert certain tax positions based on their
understanding and interpretation of the income tax law. The taxing authorities may challenge
such positions and the resolution of such matters could result in the payment and recognition of
additional income tax expense. Management believes it has used reasonable judgments and
conclusions in the preparation of its income tax returns. The Company and its subsidiaries
(including the TRSs) income tax returns are subject to examination by federal and state tax
jurisdictions for years 2005 through 2007. Net income tax loss carryforwards and other tax
attributes generated in years prior to 2005 are also subject to challenge in any examination of
the 2005 to 2007 tax years. Subsequent to September 30, 2008, the Operating Partnership
received notice that its TRSs federal income tax return for
2005 has been
selected for Internal Revenue Service examination. At this stage, it is not possible to predict
or determine the outcome of the examination, nor is it possible to estimate the amount or
whether any adjustment will be required to that tax return.
As of September 30, 2008, the Operating Partnerships taxable REIT subsidiaries (TRSs) had
unrecognized tax benefits of approximately $797 which primarily related to uncertainty regarding
the sustainability of certain deductions taken on prior year income tax returns of the TRS with
respect to the amortization of certain intangible assets. The Operating Partnership does not
expect any significant change in this unrecognized tax benefit in the remainder of 2008. To the
extent these unrecognized tax benefits are ultimately recognized, they may affect the effective
tax rate in a future period. The Operating Partnerships policy is to recognize interest and
penalties, if any, related to unrecognized tax benefits as income tax expense. Accrued interest
and penalties for the three and nine months ended September 30, 2008 and at September 30, 2008
were not material to the Operating Partnerships results of operations, cash flows or financial
position.
The Operating Partnership utilizes TRSs principally to perform such non-REIT activities as asset
and property management, for-sale housing (condominiums) conversions and sales and other
services. These TRSs are subject to federal and state income taxes. For the three and six
months ended September 30, 2008, the TRS recorded no net income tax expense (benefit) as the
provision for estimated income taxes payable is expected to be fully offset by deferred tax
benefits resulting from current period temporary differences and reductions of valuation
allowances recorded in prior years.
At December 31, 2007, management had established valuation allowances of approximately $3,157
against net deferred tax assets due primarily to historical losses at the TRSs in years prior to
2007 and the variability of the income of these subsidiaries. The tax benefits associated with
such unused valuation allowances may be recognized in future periods, if the taxable REIT
subsidiaries generate sufficient taxable income to utilize such amounts or if the Operating
Partnership determines that it is more likely than not that the related deferred tax assets are
realizable.
A summary of the components of the TRS deferred tax assets and liabilities at December 31, 2007
are included in the footnotes to the Operating Partnerships audited financial statements
included in the Form 10-K, as amended. Other than the activity discussed above relating to the
three and nine months ended September 30, 2008, there were no material changes to the components
of deferred tax assets and liabilities at September 30, 2008.
12. LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES
In November 2006, the Equal Rights Center (ERC) 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 (FHA) and the Americans with
Disabilities Act (ADA) 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, 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 FHA and the ADA and
prohibiting construction or sale of noncompliant units or complexes. On April 18, 2007,
ERC filed a motion for a preliminary injunction to prohibit the Company and the Operating
Partnership from selling any alleged noncompliant apartment communities or condominium units
while the litigation is ongoing. On July 25, 2007 the court entered an order denying ERCs
motion for the preliminary injunction. Fact discovery is mostly completed by both parties,
and the parties exchanged affirmative expert reports on July 8, 2008. On August 1, 2008,
ERC disclosed an alleged $9 million dollar damages assessment for a
portion of the compensatory damages
claimed. On August 12, 2008, the Company and the Operating Partnership filed a motion to
strike all evidence regarding that new assessment. A hearing on that motion will be held on
December 9, 2008. The parties exchanged expert rebuttal reports on October 3, 2008. Expert
discovery is scheduled to be completed by November 18, 2008, and the last briefing on
dispositive motions is due by February 3, 2009. It is possible that these dates could be
further extended. At
-39-
POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share or unit and apartment unit data)
this stage in the proceeding, it is not possible to predict or determine
the outcome of the lawsuit, nor is it possible to estimate the amount of loss that would
be associated with an adverse decision.
The Operating Partnership 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 Operating Partnership believes that any resolution of pending
proceedings or liability to the Operating Partnership which may arise as a result of these
various other legal proceedings will not have a material adverse effect on the Operating
Partnerships results of operations or financial position.
The Operating Partnership is underway with an initiative to engage third-party engineers and
consultants to inspect and evaluate each of its communities that have stucco exteriors or
exterior insulation finishing systems (EIFS) for potential water penetration and other related
issues. At this early stage of the process, the Operating Partnership has preliminarily
determined that varying levels of remediation and improvements may be required to be performed
at approximately 30 properties in its portfolio containing a total of approximately 11,000
units. The Operating Partnership preliminarily estimates that the aggregate cost of this
initiative could be in the range of $40,000 to $45,000 to complete the scope of the remediation
and improvements, although the scope and cost will vary considerably among individual
properties. The work is currently expected to be completed between now and the end of 2010 and
may include, but not be limited to, remediation, improvements and replacements of exterior
stucco and EIFS siding, windows and doors, roofing and gutters, exterior sealants and coatings.
There can be no assurance that the scope of work or the Operating Partnerships preliminary
estimates of costs will not change in the future. The component cost of the remediation,
improvements and replacements will either be capitalized or expensed as incurred in accordance
with the Operating Partnerships normal accounting policy for
capitalization of fixed assets (see
Item 2, Managements Discussion and Analysis of Financial
Condition and Results of Operations,
Capitalization of Fixed Assets and Community Improvements for further discussion). In
addition, as a result of the scope of this work, if the Operating Partnership should be required
to retire existing components of fixed assets on its consolidated balance sheet, it could result
in acceleration of depreciation or other charges in subsequent periods relating to the
undepreciated portion of these components. At this early stage of the process, however, it is
not possible to estimate the potential impact on the Operating Partnerships financial position
and results of operations in subsequent periods other than as discussed above.
-40-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company Overview
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 September 30, 2008, the Company owned 21,890 apartment units in 60 apartment
communities, including 1,747 apartment units in five communities held in unconsolidated entities
and 1,736 apartment units in five communities currently under construction and/or in lease-up. The
Company is also developing and selling 506 for-sale condominium homes in four communities
(including 129 units in one community held in an unconsolidated entity) and is converting apartment
homes in two communities initially consisting of 349 units into for-sale condominium homes through
a taxable REIT subsidiary. At September 30, 2008, approximately 40.9%, 20.3%, 12.1% and 10.1% (on
a unit basis) of the Companys operating communities were located in the Atlanta, Dallas, the
greater Washington D.C. and Tampa metropolitan areas, respectively.
The Company has elected to qualify and operate as a self-administrated and self-managed real estate
investment trust (REIT) for federal income tax purposes. A REIT is a legal entity which holds
real estate interests and is generally not subject to federal income tax on the income it
distributes to its shareholders.
At September 30, 2008, the Company owned approximately 99.3% of the common limited partnership
interests (Common Units) in the Operating Partnership. Common Units held by persons other than
the Company represented a 0.7% common minority interest in the Operating Partnership.
Conclusion of Strategic Process and Strategies to Enhance Shareholder Value
On January 23, 2008, the Company announced that its Board of Directors had authorized management,
working with financial and legal advisors, to initiate a formal process to pursue a possible
business combination or other sale transaction and to seek proposals from potentially interested
parties. The Board announced on June 25, 2008 that the process had concluded without a business
combination or other sale transaction due to the increasingly difficult market environment and a
lack of definitive proposals. In the first half of 2008, the Company incurred approximately $8,161
of strategic review costs related to this process. At that same time, the Board reaffirmed its
commitment to actively pursue other strategies to enhance shareholder value through the following
strategies:
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Realizing value through asset sales, the proceeds of which can be used to repay debt,
pay potential special dividends or repurchase shares, and fund committed investments, |
|
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|
Cutting costs by reducing corporate overhead, gross
development overhead and property management
expenses, |
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Focusing the Company by evaluating the number of markets within which it operates, and
the appropriate size of its development pipeline, and |
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Pursuing construction loan financing and joint venture equity to fund development
activity. |
Since the start of the third quarter of 2008, conditions in the global capital markets and the U.S.
economy have continued to deteriorate. The U.S. federal government has nationalized government-sponsored
mortgage entities, Fannie Mae and Freddie Mac, and has taken other substantive actions to stabilize
U.S. financial institutions and the capital markets. In response to these events, the Company has
adjusted the timing of its strategic priorities by deferring further substantive activities on its
pre-development pipeline and by focusing on maintaining the relative strength of its balance sheet
and the liquidity necessary to fund its operations, including its active pipeline of development
projects under construction and its near-term debt maturities. Since the start of the third
quarter of 2008, the Company has closed the sales of two apartment communities for total gross
proceeds of approximately $91,250 and has closed a $184,683 secured portfolio
financing with Freddie Mac. As a result, as of October 31, 2008, the Company had approximately
$597,000 of borrowing capacity under its combined $630,000 unsecured
revolving lines of credit and approximately $110,000
of available cash equivalents. The status of the Companys asset sales, development and cost
savings initiatives are discussed in further detail below.
Operations Overview
The Companys operating results have benefited from generally improved fundamentals in the
multifamily apartment market over the last several years, although the rate of growth began
moderating in 2007 and has continued into 2008. This is evidenced by a decrease in the year over
year rate of growth in same store operating revenues and property net operating income (NOI)
which increased
-41-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
2.1% and 1.1%, respectively, for the nine months ended September 30, 2008, compared to 4.7% and
4.7%, respectively, for the full year of 2007. In the third quarter of 2008, the year over year
rate of growth in same store operating revenues and NOI declined to 0.9% and 1.2%, respectively.
Recent events in the global capital markets discussed above have generated significant concerns
relating to a substantial economic slowdown in the U.S., including signs of declining job growth
and severe tightening in the credit markets. Historically, weaker economic conditions and
declining job growth in the U.S. and in the Companys markets has led to deteriorating, even
negative, revenue and NOI growth in the multifamily market. The overall tightening of the credit
markets and current conditions in the global capital markets and the U.S. economy could also make
it increasingly difficult for the Company to actively pursue sales of its assets currently held for
sale and will continue to adversely impact the Companys ability to obtain joint venture or other
financing for its development projects while these conditions persist.
The multifamily market is also being impacted by a slowdown in the overall U.S. housing market,
attributable in part to continued concerns relating to the impact of rising mortgage delinquencies,
tighter credit markets and a rising (shadow) supply of for-sale multifamily product entering the
rental market. Based on the above factors, the Company is forecasting a
decline in same store community revenues and NOI for the fourth quarter of
2008, as compared to 2007, and as more fully discussed in the Outlook section below. If the U.S.
economy has entered into a recession, the Company believes that apartment fundamentals will be
adversely affected.
The Companys operating results for the nine months ended September 30, 2008 also reflect
approximately $2,591 of severance charges related to the elimination of 40 property management,
landscaping, corporate and development employment positions as of September 30, 2008, and certain
other positions though attrition. These charges are consistent with the Companys objective to
reduce overhead expenses, and the Company currently expects that the elimination of these positions
will reduce overhead costs prospectively on an annual basis by approximately $4 million. There can
be no assurance that the Company will not recognize additional severance charges in future periods
or that the anticipated overhead savings will be achieved.
The Company has been active over the past several years in repositioning its real estate portfolio
and building its development and value creation capabilities centered upon its Southeast, Southwest
and Mid-Atlantic regions. During this time, the Company has been a net seller of apartment assets
in an effort to exploit opportunities to harvest value and recycle capital through the sale of
non-core assets that no longer meet the Companys growth objectives. The Companys 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 by reinvesting
in assets that the Company believes demonstrate better growth potential. In this regard, the
Company disposed of 807 apartment units in 2007 and 887 units in 2008 through October for aggregate
gross proceeds of approximately $91,800 and $111,100, respectively. In 2007, the Company also
transferred three communities, containing 1,202 apartment units, to a newly formed unconsolidated
entity, in which the Company retained a 25% interest. The 75% interest in these communities
effectively sold to the institutional partner generated gross proceeds of approximately $136,200.
Currently, the Company continues to market for sale six other apartment communities. The
communities, comprising 1,871 apartment units, include three communities located in Atlanta,
Georgia, one community located in the northern Virginia submarket of greater Washington, D.C., and
the Companys only two communities located in New York City. The Company currently expects to use
net proceeds to fund its committed investments, repay debt, pay potential special dividends, if
necessary, or possibly to repurchase shares of its stock. Gross proceeds that may potentially be
realized by the Company from the sales of these six communities are currently expected to be
approximately $360,000, although current conditions in the global capital markets and the U.S.
economy discussed above may adversely affect the Companys ability to sell assets, making it
difficult for potential buyers to obtain financing at attractive terms or at all. As a result,
there can be no assurance that the potential gross proceeds will be realized by the Company, used
for the purposes intended or that these assets will be sold.
As more fully described in Current Development Activity later in this Item 2, in the second
quarter of 2008, the Company made a decision to defer further activities on four of its development
projects and to abandon the pursuit of certain other development projects in light of difficult
market conditions. The total projected development costs of these projects totaled more than
$430,000. As a result, the Company recognized impairment charges for the nine months ended
September 30, 2008 of $28,947 to write down these four projects to fair market value and to write
off pursuit costs on abandoned projects.
-42-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
In response to current conditions in the global capital markets and the U.S. economy discussed
above, the Company also deferred substantive activities in the third quarter on its remaining
pre-development pipeline totaling six projects. The total projected development costs of these
projects totaled approximately $380,000. At present, management believes that the timing of future
development starts will depend largely on the stabilization of capital market conditions and the
U.S. economy, which it believes will influence conditions in employment and the local real estate
markets, the Companys ability to generate asset sales proceeds and its ability to attract
potential construction loan financing and joint venture equity to fund future development. Until
such time as substantive development activities re-commence or certain land positions are sold, the
Company expects that operating results will be adversely impacted by costs of carrying land held
for future development or sale.
As of September 30, 2008, the Companys aggregate pipeline of development projects under
construction totaled approximately $541,500 (including the Companys share, net of joint venture
partner interests, of $507,200). As of the same date, approximately $265,800 of estimated
construction costs remained to be funded by the Company (or approximately $219,000, excluding
committed construction loan financing and escrow deposits held by the construction lender). The
Company expects to fund future estimated construction expenditures primarily by utilizing available
cash equivalents, totaling approximately $110,000, and borrowing capacity under its unsecured
revolving lines of credit totaling approximately $597,000 as of October 31, 2008.
Based on the factors discussed above, there can be no assurance that projects in pre-development
will commence construction in the future or at all or that actual development costs will
approximate estimated costs. Should the Company further change its expectations regarding the
timing and projected undiscounted future cash flows expected from projects in pre-development or
land held for future development, the Company may be required to recognize additional impairment
losses in future periods. Should the Company change its current estimates of the fair value of
assets held for sale to below their carrying values, the Company may also be required to recognize
additional impairment losses in future periods.
In early 2005, the Company entered the for-sale condominium housing market to exploit the strategic
opportunity for Post to serve those consumers who are choosing to own, rather than rent, their
home. In total, the Company has converted five apartment communities since 2005, initially
consisting of 731 units (including one held in a joint venture), into for-sale condominium homes.
As of the end of the third quarter of 2008, three of these condominium conversion projects were
sold out. The other two projects, containing a total of 349 units, had on average closed the sales
of approximately 76.2% of their total units as of October 27, 2008. Beginning in the second quarter
of 2007, the Company also began closing condominium homes at two of its newly developed for-sale
condominium projects, containing 230 homes. As of October 27, 2008, the Company had on average
closed the sales of approximately 81.7% of the total units at these two communities. The Company
expects closings at these communities to continue, although slowly, through the fourth quarter of
2008 and into 2009. Beginning in 2007 and continuing presently, there has been a softening in the
condominium and single family housing markets due to increasing
supply, weak consumer confidence, tighter credit markets for home purchasers,
which the Company believes has negatively impacted the ability of prospective condominium buyers to
qualify for mortgage financing, and a significant slow down in the residential housing market in the
U.S. Further, as a result of the turmoil in the global capital markets and a slowdown in the U.S.
economy discussed above, the for-sale housing markets are likely to continue to be weak and may
even deteriorate further. As a result, condominium closings are likely to be slow at these
communities for the remainder of 2008 and into 2009.
The Company implemented reduced pricing programs in 2008 in an effort to reduce its unsold
condominium inventory at its four completed projects. These reduced pricing programs have generally
resulted in lower condominium profits in 2008 compared to prior years. There can be no assurance of
the amount or pace of future for-sale condominium sales and closings. As discussed in Note 1 to the
consolidated financial statement contained herein, the Company uses the relative sales value method
to allocate costs and recognize profits from condominium projects. This method requires the Company
to estimate its total condominium profits costs and profits each period. Should the Company further
adjust its estimates regarding costs and profits expected to be realized from its condominium
projects in future periods, the Company may recognize additional losses in subsequent periods to
reduce estimated profits previously recorded or may recognize impairment losses if the carrying
value of these assets is not deemed recoverable.
The Companys expansion into for-sale condominium housing exposes the Company to additional risks
and challenges, which if they materialize, could have an adverse impact on the Companys business,
results of operations and financial condition. As of September 30, 2008, the Company had
approximately $232,100 of total estimated capital cost (based on book value and including the
Companys investment in unconsolidated entities) committed to its for-sale condominium conversion
and ground-up development projects, including the Companys share of projected development costs
expected to be funded relating to for-sale projects currently under construction and held for sale.
See Risk Factors in the Companys Form 10-K, as amended, for the year ended December 31, 2007
(the Form 10-K) and in Item 1A of this Form 10-Q for a discussion of these and other Company risk factors.
The following discussion should be read in conjunction with the selected financial data and with
all of the accompanying consolidated financial statements appearing elsewhere in this report. This
discussion is combined for the Company and the Operating Partnership as
-43-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
their results of operations and financial condition are substantially the same except for the
effect of the 0.7% weighted average common minority interest in the Operating Partnership. See the
summary financial information in the section below titled, Results of Operations.
Disclosure Regarding Forward-Looking Statements
Certain statements made in this report, and other written or oral statements made by or on behalf
of the Company, may constitute forward-looking statements within the meaning of the federal
securities laws. In addition, the Company, or the executive officers on the Companys 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 Companys future performance,
as well as managements expectations, beliefs, plans, estimates or projections relating to the
future, are forward-looking statements within the meaning of these laws. Forward-looking statements
include statements proceeded by, followed by or that include the words believes, expects,
anticipates, plans, estimates, or similar expressions. Examples of such statements in this
report include expectations with respect to the Companys strategies to enhance shareholder value,
the Companys anticipated performance for the remainder of 2008 (including the Companys
assumptions for such performance and expected levels of costs and expenses to be incurred in 2008),
anticipated apartment community sales in 2008 (including estimated proceeds, estimated gains on
sales and the use of proceeds from such sales), anticipated conversion of apartment communities
into condominium homes, development of new for-sale condominium housing and the related sales of
the for-sale condominium homes, anticipated future acquisition and development activities
(including projected costs, timing and anticipated potential sources of financing), anticipated
costs and timing to remediate and improve apartment communities with stucco and EIFS exteriors,
accounting recognition and measurement of guarantees, anticipated refinancing and other new
financing needs, the anticipated dividend level in 2008, the Companys ability to meet new
construction, development and other long-term liquidity requirements, expected overhead and
severance expenses, its ability to execute future asset sales, expected impact that a resolution of
any legal proceeding may have on the Company, anticipated impact of a U.S. recession
on the Company, the Companys ability under its credit facilities to
execute the remainder of its 2008 business plan and to meet its short term
liquidity requirements and expected enhancement in value of the Companys properties
currently in rehabilitation. Forward-looking statements are
only predictions and are not guarantees of performance. These statements are based on beliefs and
assumptions of the Companys 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 Companys 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 Companys ability to control
or predict. Such factors include, but are not limited to, the following:
|
|
The success of the Companys business strategies described on pages 2 to 3 of the Form
10-K and those discussed under Conclusion of Strategic Process and Strategies to Enhance
Shareholder Value in this Management Discussion and Analysis of Financial Condition and
Results of Operations; |
|
|
Future local and national economic conditions, including changes in job growth, interest
rates, the availability of mortgage and other financing and related factors; |
|
|
Uncertainties associated with the global capital markets, including the continued
availability of traditional sources of capital and liquidity and related factors; |
|
|
Demand for apartments in the Companys markets and the effect on occupancy and rental
rates; |
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|
The impact of competition on the Companys business, including competition for residents
in the Companys apartment communities and buyers of the Companys for-sale condominium homes
and development locations; |
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|
The uncertainties associated with the Companys real estate development, including actual
costs exceeding the Companys budgets or development periods exceeding expectations; |
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Uncertainties associated with the timing and amount of apartment community sales, the
market for such sales and the resulting gains/losses associated with such sales; |
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The Companys ability to enter into new joint ventures and the availability of equity
financing from traditional real estate investors to fund development activities; |
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|
The Companys ability to obtain construction loan financing to fund development
activities; |
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Uncertainties associated with the Companys condominium conversion and for-sale housing
business, including the timing and volume of condominium sales; |
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|
Uncertainties associated with loss of personnel in connection with the Companys reduction
of corporate and property development and management overhead; |
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Conditions affecting ownership of residential real estate and general conditions in the
multi-family residential real estate market; |
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Uncertainties associated with environmental and other regulatory matters; |
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The impact of the Companys ongoing litigation with the Equal Rights Center regarding the
Americans with Disabilities Act and the Fair Housing Act (including any award of compensatory
or punitive damages or injunctive relief requiring the Company to |
-44-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
|
|
retrofit apartments or public use areas or prohibiting the sale of apartment communities or
condominium units) as well as the impact of other litigation; |
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The effects of changes in accounting policies and other regulatory matters detailed in the
Companys filings with the Securities and Exchange Commission and uncertainties of
litigation; |
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|
The Companys ability to continue to qualify as a REIT under the Internal Revenue Code;
and |
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Other factors, including the risk factors discussed in Item
1A of the Form 10-K and Item 1A of this Form 10-Q. |
Management believes these forward-looking statements are reasonable; however, undue reliance should
not be placed on any forward-looking statements, which are based on current expectations. Further,
forward-looking statements speak only as of the date they are made, and management undertakes no
obligation to update publicly any of them in light of new information or future events.
Critical Accounting Policies and New Accounting Pronouncements
In the preparation of financial statements and in the determination of Company operating
performance, the Company utilizes certain significant accounting polices. The Companys
significant accounting policies are included in the notes to the Companys consolidated financial
statements included in the Companys Annual Report on Form 10-K, as amended, for the year ended
December 31, 2007. The Companys critical accounting policies are those that require application
of managements most difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may change in
subsequent periods. For a complete description of the Companys critical accounting policies,
please refer to pages 28 and 29 of the Form 10-K. There were no significant changes to the
Companys critical accounting policies and estimates during the nine months ended September 30,
2008. The discussion below addresses the implementation and impact of recently issued and adopted
accounting pronouncements with an impact on the Company for the nine months ended September 30,
2008 or that may have an impact on future reported results.
SFAS No. 157, Fair Value Measurements, was issued in September 2006. SFAS No. 157 provides a
definition of fair value and establishes a framework for measuring fair value. SFAS No. 157
clarified the definition of fair value in an effort to eliminate inconsistencies in the application
of fair value under generally accepted accounting principles. Additional disclosure focusing on
the methods used to determine fair value is also required. The Company adopted SFAS No. 157 on
January 1, 2008, specifically related to the valuation of the Companys derivative instrument at
fair value and the Companys impairment valuation analysis related to real estate assets. The
valuations were made using observable and unobservable market data for similar instruments and
assets.
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities including an
amendment of FASB Statement No. 115, was issued in February 2007. SFAS No. 159 gives the Company
the irrevocable option to carry most financial assets and liabilities at fair value, with changes
in fair value recognized in earnings. The Company adopted SFAS No. 159 on January 1, 2008, and the
adoption did not have a material impact on the Companys financial position and results of
operations. The Company did not elect to record any of its financial assets and liabilities at
fair value in 2008 that were not recorded as such under existing accounting pronouncements.
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, was issued in
December 2007. SFAS No. 160 requires all entities to report noncontrolling (minority) interests in
subsidiaries as equity in the consolidated financial statements. SFAS No. 160 is effective for the
Company on January 1, 2009. The Company is currently evaluating the potential impact of SFAS No.
160 on the Companys financial position and results of operations.
SFAS No. 141R, Business Combinations, was issued in December 2007. SFAS No. 141R will replace
SFAS No. 141 on the date it becomes effective. SFAS No. 141R will require 1) acquirers to
recognize all of the assets acquired and liabilities assumed in a business combination at fair
value, 2) that the acquisition date be used to determine fair value for all assets acquired and
all liabilities assumed, and 3) enhanced disclosures for the acquirer surrounding the financial
effects of the business combination. The provisions of SFAS 141R will lead to the expensing of
acquisition related transaction costs and the potential recognition of acquisition related
contingencies. SFAS No. 141R is effective for the Company on January 1, 2009. The Company is
currently evaluating the potential impact of SFAS No. 141R on the Companys financial position and
results of operations.
-45-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
Results of Operations
The following discussion of results of operations should be read in conjunction with the
consolidated statements of operations and the community operations/segment performance information
included below.
The Companys revenues and earnings are generated primarily from the operation of its apartment
communities. For purposes of evaluating comparative operating performance, the Company categorizes
its operating communities based on the period each community reaches stabilized occupancy. The
Company generally considers a development 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.
At September 30, 2008, the Companys portfolio of operating apartment communities, excluding five
communities held in unconsolidated entities consisted of the following: (1) 36 communities that
were completed and stabilized for all of the current and prior year, (2) two communities that
achieved full stabilization during 2007, (3) six communities and an additional phase of one
community under rehabilitation programs or in lease-up, (4) one community that was acquired in 2007
and (5) portions of two communities that are being converted into condominiums that are reflected
in continuing operations. These community totals exclude three communities under development (not
currently in lease-up) and the operations of seven apartment communities classified in discontinued
operations.
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
property 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 Companys consolidated statement of
operations entitled net income is the most directly comparable GAAP measure to net operating
income. A reconciliation of net operating income to GAAP net income is included below. The
Company believes that net operating income is an important supplemental measure of operating
performance for a REITs 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.
-46-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
All Operating Communities
The operating performance and capital expenditures from continuing operations for all of the
Companys apartment communities, condominium conversion communities included in continuing
operations, and other commercial properties summarized by segment for the three and nine months
ended September 30, 2008 and 2007 is summarized as follows:
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Three months ended |
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Nine months ended |
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September 30, |
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|
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|
September 30, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
Rental and other property revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully stabilized communities (1) |
|
$ |
52,037 |
|
|
$ |
51,588 |
|
|
|
0.9 |
% |
|
$ |
154,555 |
|
|
$ |
151,377 |
|
|
|
2.1 |
% |
Communities stabilized during 2007 (2) |
|
|
2,749 |
|
|
|
2,261 |
|
|
|
21.6 |
% |
|
|
7,967 |
|
|
|
5,094 |
|
|
|
56.4 |
% |
Development, rehabilitation and
lease-up communities |
|
|
5,067 |
|
|
|
4,103 |
|
|
|
23.5 |
% |
|
|
13,905 |
|
|
|
11,901 |
|
|
|
16.8 |
% |
Condominium conversion and other communities (3) |
|
|
160 |
|
|
|
1,625 |
|
|
|
(90.2 |
)% |
|
|
549 |
|
|
|
8,409 |
|
|
|
(93.5 |
)% |
Acquired communities (4) |
|
|
1,363 |
|
|
|
830 |
|
|
|
64.2 |
% |
|
|
4,040 |
|
|
|
830 |
|
|
|
386.7 |
% |
Other property segments (5) |
|
|
6,206 |
|
|
|
5,832 |
|
|
|
6.4 |
% |
|
|
18,421 |
|
|
|
17,216 |
|
|
|
7.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,582 |
|
|
|
66,239 |
|
|
|
2.0 |
% |
|
|
199,437 |
|
|
|
194,827 |
|
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating and maintenance
expenses (excluding depreciation
and amortization) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully stabilized communities (1) |
|
|
20,848 |
|
|
|
20,776 |
|
|
|
0.3 |
% |
|
|
62,452 |
|
|
|
60,308 |
|
|
|
3.6 |
% |
Communities stabilized during 2007 (2) |
|
|
1,033 |
|
|
|
971 |
|
|
|
6.4 |
% |
|
|
3,200 |
|
|
|
3,010 |
|
|
|
6.3 |
% |
Development, rehabilitation and
lease-up communities |
|
|
3,029 |
|
|
|
2,021 |
|
|
|
49.9 |
% |
|
|
8,342 |
|
|
|
5,909 |
|
|
|
41.2 |
% |
Condominium conversion and other communities (3) |
|
|
64 |
|
|
|
774 |
|
|
|
(91.7 |
)% |
|
|
216 |
|
|
|
3,703 |
|
|
|
(94.2 |
)% |
Acquired communities (4) |
|
|
582 |
|
|
|
357 |
|
|
|
63.0 |
% |
|
|
1,875 |
|
|
|
357 |
|
|
|
425.2 |
% |
Other property segments, including corporate
management expenses (6) |
|
|
6,989 |
|
|
|
7,270 |
|
|
|
(3.9 |
)% |
|
|
22,472 |
|
|
|
22,498 |
|
|
|
(0.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,545 |
|
|
|
32,169 |
|
|
|
1.2 |
% |
|
|
98,557 |
|
|
|
95,785 |
|
|
|
2.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property net operating income (7) |
|
$ |
35,037 |
|
|
$ |
34,070 |
|
|
|
2.8 |
% |
|
$ |
100,880 |
|
|
$ |
99,042 |
|
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures (8)(9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annually recurring: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carpet |
|
$ |
800 |
|
|
$ |
538 |
|
|
|
48.7 |
% |
|
$ |
2,072 |
|
|
$ |
2,181 |
|
|
|
(5.0 |
)% |
Other |
|
|
1,691 |
|
|
|
1,627 |
|
|
|
3.9 |
% |
|
|
5,192 |
|
|
|
4,884 |
|
|
|
6.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,491 |
|
|
$ |
2,165 |
|
|
|
15.1 |
% |
|
$ |
7,264 |
|
|
$ |
7,065 |
|
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periodically recurring |
|
$ |
1,768 |
|
|
$ |
1,670 |
|
|
|
5.9 |
% |
|
$ |
4,968 |
|
|
$ |
5,397 |
|
|
|
(7.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average apartment units in service |
|
|
16,193 |
|
|
|
16,235 |
|
|
|
(0.3 |
)% |
|
|
16,105 |
|
|
|
16,246 |
|
|
|
(0.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Communities which reached stabilization prior to January 1, 2007. |
|
(2) |
|
Communities which reached stabilization in 2007. |
|
(3) |
|
Portions of existing apartment communities being converted into condominiums that are
reflected in continuing operations under SFAS No. 144 and communities converted to joint
venture ownership in 2007. |
|
(4) |
|
Communities acquired subsequent to January 1, 2007. |
|
(5) |
|
Other property segment revenues include revenues from commercial properties, from furnished
apartment rentals above the unfurnished rental rates and any property revenue not directly
related to property operations. Other property segment revenues exclude other corporate
revenues of $261 and $171 for the three months ended and $735 and $416 for the nine months
ended September 30, 2008 and 2007, respectively. |
|
(6) |
|
Other expenses includes certain indirect central office operating expenses related to
management, grounds maintenance, and costs associated with commercial properties and
furnished apartment rentals. |
|
(7) |
|
A reconciliation of property net operating income to GAAP net income is detailed below. |
-47-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Total same store NOI |
|
$ |
31,189 |
|
|
$ |
30,812 |
|
|
$ |
92,103 |
|
|
$ |
91,069 |
|
Property NOI from other operating segments |
|
|
3,848 |
|
|
|
3,258 |
|
|
|
8,777 |
|
|
|
7,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated property NOI |
|
|
35,037 |
|
|
|
34,070 |
|
|
|
100,880 |
|
|
|
99,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add (subtract): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
96 |
|
|
|
189 |
|
|
|
367 |
|
|
|
652 |
|
Other revenues |
|
|
261 |
|
|
|
171 |
|
|
|
735 |
|
|
|
416 |
|
Minority interest in consolidated
property partnerships |
|
|
52 |
|
|
|
(452 |
) |
|
|
113 |
|
|
|
(1,146 |
) |
Depreciation |
|
|
(14,979 |
) |
|
|
(14,522 |
) |
|
|
(43,628 |
) |
|
|
(43,248 |
) |
Interest expense |
|
|
(11,471 |
) |
|
|
(10,658 |
) |
|
|
(31,739 |
) |
|
|
(32,566 |
) |
Amortization of deferred financing costs |
|
|
(869 |
) |
|
|
(828 |
) |
|
|
(2,579 |
) |
|
|
(2,469 |
) |
General and administrative |
|
|
(4,461 |
) |
|
|
(4,761 |
) |
|
|
(15,265 |
) |
|
|
(16,168 |
) |
Investment and development |
|
|
(1,834 |
) |
|
|
(2,007 |
) |
|
|
(4,648 |
) |
|
|
(5,512 |
) |
Strategic review costs |
|
|
|
|
|
|
|
|
|
|
(8,161 |
) |
|
|
|
|
Impairment, severance and other charges |
|
|
(5,002 |
) |
|
|
|
|
|
|
(34,302 |
) |
|
|
|
|
Gains on sales of real estate assets, net |
|
|
476 |
|
|
|
5,061 |
|
|
|
2,227 |
|
|
|
71,506 |
|
Equity in income of unconsolidated
real estate entities |
|
|
260 |
|
|
|
402 |
|
|
|
1,081 |
|
|
|
1,216 |
|
Other income (expense), net |
|
|
534 |
|
|
|
(262 |
) |
|
|
426 |
|
|
|
(784 |
) |
Minority interest of common unitholders |
|
|
14 |
|
|
|
(41 |
) |
|
|
298 |
|
|
|
(923 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(1,886 |
) |
|
|
6,362 |
|
|
|
(34,195 |
) |
|
|
70,016 |
|
Income from discontinued operations |
|
|
28,962 |
|
|
|
4,687 |
|
|
|
38,894 |
|
|
|
29,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
27,076 |
|
|
$ |
11,049 |
|
|
$ |
4,699 |
|
|
$ |
99,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8) |
|
In addition to those expenses which relate to property operations, the Company incurs
annually recurring and periodically recurring capital expenditures relating to acquiring and
developing new assets, materially enhancing the value of an existing asset, or substantially
extending the useful life of an existing asset, all of which are capitalized. Annually
recurring capital expenditures are those that are generally expected to be incurred on an
annual basis. Periodically recurring capital expenditures are those that generally occur
less frequently than on an annual basis. |
(9) |
|
A reconciliation of property capital expenditures from continuing operations to total
annually recurring and periodically recurring capital expenditures as presented in the
consolidated statements of cash flows under GAAP is detailed below. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Annually recurring capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
2,491 |
|
|
$ |
2,165 |
|
|
$ |
7,264 |
|
|
$ |
7,065 |
|
Discontinued operations |
|
|
462 |
|
|
|
570 |
|
|
|
1,328 |
|
|
|
1,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total annually recurring capital expenditures
per statements of cash flows |
|
$ |
2,953 |
|
|
$ |
2,735 |
|
|
$ |
8,592 |
|
|
$ |
8,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periodically recurring capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
1,768 |
|
|
$ |
1,670 |
|
|
$ |
4,968 |
|
|
$ |
5,397 |
|
Discontinued operations |
|
|
15 |
|
|
|
86 |
|
|
|
146 |
|
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total periodically recurring capital expenditures
per statements of cash flows |
|
$ |
1,783 |
|
|
$ |
1,756 |
|
|
$ |
5,114 |
|
|
$ |
5,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-48-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
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, adjusted by communities sold and classified as held for sale
and communities under rehabilitation. For the 2008 to 2007 comparison, fully stabilized
communities are defined as those communities which reached stabilization prior to January 1, 2007.
This portfolio consisted of 36 communities with 13,693 units, including 10 communities with 4,243
units (31.0%) located in Atlanta, Georgia, 10 communities with 3,095 units (22.6%) located in
Dallas, Texas, four communities with 1,700 units (12.4%) located in the greater Washington, DC
area, three communities with 1,877 units (13.7%) located in Tampa, Florida, four communities with
1,388 units (10.1%) located in Charlotte, North Carolina and five communities with 1,390 units
(10.2%) located in other markets. The operating performance and capital expenditures of these
communities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
Rental and other revenues |
|
$ |
52,037 |
|
|
$ |
51,588 |
|
|
|
0.9 |
% |
|
$ |
154,555 |
|
|
$ |
151,377 |
|
|
|
2.1 |
% |
Property operating and maintenance expenses
(excluding depreciation and amortization) |
|
|
20,848 |
|
|
|
20,776 |
|
|
|
0.3 |
% |
|
|
62,452 |
|
|
|
60,308 |
|
|
|
3.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store net operating income (1) |
|
$ |
31,189 |
|
|
$ |
30,812 |
|
|
|
1.2 |
% |
|
$ |
92,103 |
|
|
$ |
91,069 |
|
|
|
1.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annually recurring: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carpet |
|
$ |
759 |
|
|
$ |
756 |
|
|
|
0.4 |
% |
|
$ |
1,913 |
|
|
$ |
1,945 |
|
|
|
(1.6 |
)% |
Other |
|
|
1,320 |
|
|
|
1,023 |
|
|
|
29.0 |
% |
|
|
3,953 |
|
|
|
3,284 |
|
|
|
20.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total annually recurring |
|
|
2,079 |
|
|
|
1,779 |
|
|
|
16.9 |
% |
|
|
5,866 |
|
|
|
5,229 |
|
|
|
12.2 |
% |
Periodically recurring |
|
|
1,562 |
|
|
|
856 |
|
|
|
82.5 |
% |
|
|
4,375 |
|
|
|
1,992 |
|
|
|
119.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures (A) |
|
$ |
3,641 |
|
|
$ |
2,635 |
|
|
|
38.2 |
% |
|
$ |
10,241 |
|
|
$ |
7,221 |
|
|
|
41.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures per unit
(A ÷ 13,693 units) |
|
$ |
266 |
|
|
$ |
192 |
|
|
|
38.5 |
% |
|
$ |
748 |
|
|
$ |
527 |
|
|
|
41.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average economic occupancy (3) |
|
|
95.3 |
% |
|
|
95.3 |
% |
|
|
0.0 |
% |
|
|
94.5 |
% |
|
|
94.5 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average monthly rental rate per unit (4) |
$ |
1,244 |
|
|
$ |
1,232 |
|
|
|
1.0 |
% |
|
$ |
1,244 |
|
|
$ |
1,219 |
|
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net operating income of stabilized communities is a supplemental non-GAAP financial
measure. See page 48 for a reconciliation of net operating income for stabilized
communities to GAAP net income. |
-49-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
(2) |
|
A reconciliation of these segment components of property capital expenditures to total
annually recurring and periodically recurring capital expenditures as presented in the
consolidated statements of cash flows prepared under GAAP detailed below. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Annually recurring capital expenditures by operating segment
Fully stabilized |
|
$ |
2,079 |
|
|
$ |
1,779 |
|
|
$ |
5,866 |
|
|
$ |
5,229 |
|
Communities stabilized during 2007 |
|
|
30 |
|
|
|
19 |
|
|
|
151 |
|
|
|
42 |
|
Development, rehabilitation and lease-up |
|
|
327 |
|
|
|
217 |
|
|
|
982 |
|
|
|
878 |
|
Condominium conversion and other |
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
672 |
|
Acquired |
|
|
26 |
|
|
|
4 |
|
|
|
93 |
|
|
|
4 |
|
Other segments |
|
|
491 |
|
|
|
659 |
|
|
|
1,500 |
|
|
|
1,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total annually recurring capital expenditures per
statements of cash flows |
|
$ |
2,953 |
|
|
$ |
2,735 |
|
|
$ |
8,592 |
|
|
$ |
8,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periodically recurring capital expenditures by operating
segment
Fully stabilized |
|
$ |
1,562 |
|
|
$ |
856 |
|
|
$ |
4,375 |
|
|
$ |
1,992 |
|
Communities stabilized during 2007 |
|
|
81 |
|
|
|
363 |
|
|
|
98 |
|
|
|
2,337 |
|
Development, rehabilitation and lease-up |
|
|
10 |
|
|
|
132 |
|
|
|
104 |
|
|
|
405 |
|
Condominium conversion and other |
|
|
|
|
|
|
192 |
|
|
|
|
|
|
|
418 |
|
Acquired |
|
|
4 |
|
|
|
|
|
|
|
39 |
|
|
|
|
|
Other segments |
|
|
126 |
|
|
|
213 |
|
|
|
498 |
|
|
|
471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total periodically recurring capital expenditures per
statements of cash flows |
|
$ |
1,783 |
|
|
$ |
1,756 |
|
|
$ |
5,114 |
|
|
$ |
5,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys other operating
segments consisting of communities stabilized in the prior year, development, rehabilitation
and lease-up communities, condominium conversion communities, acquired communities, held for
sale communities and sold communities in addition to same store information. Therefore, the
Company believes that the Companys 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
Companys consolidated statements of cash flows entitled annually recurring capital
expenditures and periodically recurring capital expenditures. |
|
(3) |
|
Average economic occupancy is defined as gross potential rent less vacancy losses, model
expenses and bad debt expenses divided by gross potential rent for the period, expressed as
a percentage. Gross potential rent is defined as the sum of the gross actual rental rates
for leased units and the anticipated rental rates for unoccupied units. The calculation of
average economic occupancy does not include a deduction for net concessions and employee
discounts. Average economic occupancy, including these amounts, would have been 94.4% and
94.5% for the three months ended and 93.6% and 93.7% for the nine months ended September 30,
2008 and 2007, respectively. For the three months ended September 30, 2008 and 2007, net
concessions were $301 and $232, respectively, and employee discounts were $140 and $156,
respectively. For the nine months ended September 30, 2008 and 2007, net concessions were
$908 and $659, respectively, and employee discounts were $426 and $465, respectively. |
|
(4) |
|
Average monthly rental rate is defined as the average of the gross actual rental rates for
leased units and the average of the anticipated rental rates for unoccupied units, divided
by total units. |
Comparison of Three Months Ended September 30, 2008 to Three Months Ended September 30, 2007
The Operating Partnership reported net income available to common unitholders of $25,365 for the
three months ended September 30, 2008 compared to $9,247 for the three months ended September 30,
2007. The Company reported net income available to common shareholders of $25,167 for the three
months ended September 30, 2008 compared to $9,140 for the three months ended September 30, 2007.
As discussed below, the increase between periods primarily reflects gains on the sale of an
apartment community in 2008, partially offset by severance charges of $2,238 and losses associated
with hurricane damage of $2,764 in 2008.
Rental and other revenues from property operations increased $1,343 or 2.0% from 2007 to 2008
primarily due to increased revenues from the Companys fully stabilized communities of $449 or
0.9%, increased revenues from communities that achieved full stabilization in 2007 of $488 or
21.6%, increased revenues from development, rehabilitation and lease-up communities of $964 or
23.5% and increased revenues from acquired communities of $533, offset by reduced revenues from
condominium conversion and other communities of $1,465 or 90.2%. The moderate revenue increase
from fully stabilized communities of $449 is discussed more fully below. The revenue increase from
communities that achieved full stabilization in 2007 reflects two communities that were fully
-50-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
stabilized for the third quarter of 2008 compared to the communities being in lease up and under
rehabilitation in 2007. The revenue increase from development, rehabilitation and lease-up
communities primarily reflects the lease-up of two development communities and one community
expansion in 2008. The revenue increase from acquired communities reflects the Companys
acquisition of one community in late July 2007. The revenue decrease from condominium conversion
and other communities was due primarily to the transfer and sale of a 75% interest in one community
to an unconsolidated entity in December 2007 and to a lesser extent the reduction of leased units
at condominium conversion communities as units were vacated for conversion and sale throughout 2008
and 2007.
Property operating and maintenance expenses (exclusive of depreciation and amortization) increased
$376 or 1.2% from 2007 to 2008 primarily due to increases from development, rehabilitation and
lease-up communities of $1,008 or 49.9% and from acquisition communities of $225 or 63.0%, offset
by reduced expenses from condominium conversion and other communities of $710 or 91.7%. The
moderate expense increase from stabilized communities of $72 is discussed below. The expense
increase from development, rehabilitation and lease-up communities reflects the lease-up of two
communities and one community expansion in late 2007 and early 2008. The expense increase from
acquisition communities reflects a full quarter of expenses in 2008 from the community acquired in
July 2007. The expense decrease from condominium conversion and other communities primarily
reflects the reduced expenses from the transfer and sale of a 75% interest in one community to an
unconsolidated entity in December 2007.
For the three months ended September 30, 2008, gains on sales of real estate assets from
condominium sales activities in continuing operations represented net gains of $476 compared to net
gains of $5,061 for the three months ended September 30, 2007. There were no condominium gains
included in discontinued operations for the three months ended September 30, 2008 compared to
condominium gains in discontinued operations of $311 for the three months ended September 30, 2007.
The decrease in aggregate condominium gains between periods primarily reflects the sales of 18
units at newly developed communities in 2008 compared to 56 units in 2007. Unit sales at
condominium conversion communities also decreased from 27 sales in 2007 to 12 in 2008.
Additionally, the decrease in condominium profits between periods reflects lower revenue and profit
margin expectations in 2008. Lower revenues and profit margins resulted primarily from the slower
residential housing market in 2008 resulting from tighter credit markets, an over supply of
condominium units and softening general economic conditions. The Company expects profits from
condominium sales activities to continue at a slow pace for the fourth quarter of 2008 as the
backlog of condominiums under contract continues to be low and due to the further tightening of
credit market conditions in an already slow for-sale housing market as well as a significant
expected decline in overall U.S. economic activity. See the Outlook section below for a
discussion of expected condominium sale closings at the Companys condominium communities.
Depreciation expense increased $457 or 3.1% from 2007 to 2008 primarily due to an increase in
depreciation of $730 related to development and lease-up communities as apartment units were placed
in service in late 2007 and early 2008 offset by decreased depreciation of $215 between periods
resulting from the contribution of one community into an unconsolidated entity in late 2007, and
decreased depreciation of $232 between periods related to one community acquired in 2007 due to the
amortization of acquired lease intangible assets that became fully amortized in early 2008.
General and administrative expenses decreased $300, or 6.3%, from 2007 to 2008 primarily due
reduced executive incentive compensation accruals and reduced accruals for certain employee award
programs that were eliminated as part of the Companys initiative to reduce expenses offset
somewhat by increases in the Companys variable compensation costs due to the timing of changes in
the Companys stock price between years. In addition, corporate governance expenses were somewhat
lower in 2008 primarily due to the timing of the expenses between periods.
Investment and development expenses decreased $173 or 8.6% from 2007 to 2008. In 2008, development
personnel and other costs decreased $190 over 2007 due to a modest workforce reduction as well as a
reduction in incentive compensation in the third quarter of 2008. The capitalization of
development personnel remained essentially flat between periods, reflecting the completion of
projects started in prior years and the lack of new starts in 2008. Due to current economic
conditions and tight capital markets, the Company does not anticipate the start of new development
projects in the near term. In the absence of further cost reductions, the lack of new starts will
result in lower capitalized costs to development projects and higher net investment and development
expenses in future periods.
Impairment, severance and other charges in 2008 included severance charges of $2,238 associated
with the elimination of certain property management, corporate and development positions in the
third quarter of 2008. The severance charges resulted from decisions to reduce the Companys
personnel costs after the conclusion of the strategic review process conducted in the first six
months of 2008. The workforce reductions began in the second quarter of 2008. The Company may
record additional severance charges in the fourth quarter of 2008 or in future periods, depending
on market conditions and the Companys business plans. See note 8 to the consolidated financial
statements for further discussion. Additionally, the Company recorded estimated casualty losses
-51-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
of approximately $2,764 in the third quarter of 2008, related to damage sustained at the Companys
Houston, Texas properties from Hurricane Ike in September 2008. The Company currently estimates
that these losses will be below its insured wind storm deductible.
Interest expense included in continuing operations increased $813 or 7.6% from 2007 to 2008. The
increased expense amounts between periods primarily reflects increased expense of approximately
$508 associated with the amortization of accumulated other comprehensive losses from hedging
arrangements due to the ineffectiveness of the Companys interest rate swap arrangement in the
third quarter of 2008. In addition, interest expense under the Companys taxable FNMA variable
rate debt (the hedged debt) and associated swap arrangement increased approximately $129 primarily
due to the turmoil in short-term credit markets resulting from deteriorating global capital
market conditions in the third quarter of 2008. Interest capitalization remained essentially flat
between periods. Interest capitalization is expected to decrease in the fourth quarter of 2008 due
to the cessation of interest capitalization on five pre-development projects that are no longer
probable of starting in the near term. The Company expects interest expense in the fourth quarter
of 2008 to be higher than the fourth quarter of 2007 due to the amortization discussed herein, the
increased interest costs of the FNMA variable rate debt, the cessation of interest capitalization
on five pre-development projects that are no longer probable of starting in the near term and the
increased interest expense associated with a new secured, fixed rate borrowing that closed early in
the fourth quarter of 2008. Interest expense included in discontinued operations decreased from
$2,565 in 2007 to $1,776 in 2008 primarily due to interest expense associated with nine communities
classified as held for sale or sold in 2008 compared to twelve communities classified as held for
sale or sold in 2007.
Equity in income of unconsolidated real estate entities decreased $142 or 35.3% from 2007 to 2008.
The decrease was primarily due to increased interest expense at two of the unconsolidated entities
that refinanced debt during the third quarter of 2008 at both higher principal amounts and higher
interest rates.
Other income (expense), net in 2008 primarily related to non-cash income related to the
mark-to-market of the Companys interest rate swap arrangement of $663 due to the ineffectiveness
of the interest rate swap arrangement during the third quarter of 2008. Other expenses in 2008 and
2007 related to estimated state franchise and other income taxes.
Annually recurring and periodically recurring capital expenditures from continuing operations
increased $424 or 11.1% from 2007 to 2008. The increase in annually recurring capital expenditures
of $326 primarily reflects an increase related to amenity and breezeway upgrades of $98, appliance
expenditures of $107 as well as the general timing of expenditures between periods. The increase
in periodically recurring capital expenditures of $98 primarily reflects increased costs associated
with the Companys resident design center program, of $368 as well as capital expenditures for
water penetration issues at one community of approximately $674, offset by reduced expenditures
associated with one community under rehabilitation in 2007 of $282, one community contributed to an
unconsolidated entity in late 2007 of $192 as well as reduced access
upgrade expenditures at several communities
between years. The resident design center program offers certain residents selected unit
enhancements (principally appliance upgrades, granite counter tops, closet organizers, wood
flooring and wood blinds) in return for increased rental revenues. The resident design center
program started in late 2007 with a more significant roll out in 2008. Capital expenditures
related to this program are expected to continue for the remainder of 2008.
Fully Stabilized Communities
Rental and other revenues increased $449 or 0.9% from 2007 to 2008. This increase resulted from a
1.0% increase in the average monthly rental rate per apartment unit. This increase in average
rental rates resulted in a revenue increase of approximately $474 between years. Average economic
occupancy levels remained relatively flat at 95.3% between years. The occupancy change between periods
resulted in higher vacancy losses of $12 in 2008. Other property revenues decreased $12 due
primarily to slightly higher net concessions between years of $67 and lower leasing fees of $115
offset by higher utility reimbursements of $170. Overall, the revenue performance of the operating
portfolio in the third quarter of 2008 reflected moderate, yet
declining, market conditions (see Company Overview and Outlook where discussed further). The
Company continues to focus on maximizing rental rates in 2008 while also maintaining a rental rate
structure that enables average occupancy rates to remain at mid-90% levels. See the Outlook
section below for an additional discussion of trends for the fourth quarter of 2008.
Property operating and maintenance expenses (exclusive of depreciation and amortization) increased
$72 or 0.3% from 2007 to 2008. This increase was primarily due to increased property tax expenses
of $205 or 3.0% and increased utility expenses of $266 or 9.3%, offset by decreased maintenance
expenses of $231 or 8.6% and decreased insurance expenses of $208 or 18.0%. Property tax expenses
increased due to increased accrual rates in 2008 resulting from actual and expected tax increases
in 2008. Utility expenses increased due to generally higher utility rates and due to the
expiration in early 2008 of a favorable pricing program in Texas. Maintenance expenses decreased
due to the timing of the expenses, primarily painting, between years. For the full year of 2008,
the Company expects exterior painting expenses to be somewhat higher compared to 2007. Insurance
expenses decreased primarily due
-52-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
to lower property insurance costs resulting from lower property insurance rates on the renewal of
the Companys polices in the second quarter of 2008.
Comparison of Nine Months Ended September 30, 2008 to Nine Months Ended September 30, 2007
The Operating Partnership reported a net loss attributable to common unitholders of $1,037 for the
nine months ended September 30, 2008 compared to net income available to common unitholders of
$95,098 for the nine months ended September 30, 2007. The Company reported a net loss attributable
to common shareholders of $1,029 for the nine months ended September 30, 2008 compared to net
income available to common shareholders of $93,729 for the nine months ended September 30, 2007.
As discussed below, the decrease between periods primarily reflects reduced gains on sales of
apartment communities, in both continuing and discontinued operations, and land parcels of $50,381
between years and strategic review, impairment, severance and other costs of $42,463 in 2008.
Rental and other revenues from property operations increased $4,610 or 2.4% from 2007 to 2008
primarily due to increased revenues from the Companys fully stabilized communities of $3,178 or
2.1%, increased revenues of $2,873 or 56.4% from communities that achieved full stabilization in
2007, increased revenue from development, rehabilitation and lease-up communities of $2,004 or
16.8% and increased revenues from acquired communities of $3,210, offset by reduced revenues from
condominium conversion and other communities of $7,860. The revenue increase from fully stabilized
communities is discussed more fully below. The revenue increase from communities that achieved
full stabilization in 2007 reflects two communities that were fully stabilized for 2008 compared to
the communities being in lease up and under rehabilitation for 2007. The revenue increase from
development, rehabilitation and lease-up communities reflects the lease-up of two communities and
one community expansion in late 2007 and early 2008. The revenue increase from acquired
communities reflects the Companys acquisition of one community in July 2007. The revenue decrease
from condominium conversion and other communities was due primarily to the transfer and sale of a
75% interest in three communities to an unconsolidated entity in mid to late 2007 and to a lesser
extent the reduction of leased units as units were vacated for conversion and sale throughout 2008
and 2007.
Property operating and maintenance expenses (exclusive of depreciation and amortization) increased
$2,772 or 2.9% from 2007 to 2008 primarily due to increases from fully stabilized communities of
$2,144 or 3.6%, from development, rehabilitation and lease-up communities of $2,433 or 41.2% and
from acquisition communities of $1,518, offset by reduced expenses from condominium conversion and
other communities of $3,487 or 94.2%. The expense increase from stabilized communities is
discussed below. The expense increase from development, rehabilitation and lease-up communities
reflects the lease-up of two communities and one community expansion in late 2007 and early 2008.
The expense increase from acquisition communities reflects nine months of expenses in 2008 from the
community acquired in July 2007. The expense decrease from condominium conversion and other
communities primarily reflects the reduced expenses from the transfer and sale of a 75% interest in
three communities to an unconsolidated entity in mid to late 2007.
For the nine months ended September 30, 2008, gains on real estate assets in discontinued
operations included a gain of $25,831 from the sale of two apartment communities containing 393
apartment units. For the nine months ended September 30, 2007, gains on sales of real estate
assets in continuing operations included a 75% proportionate gain of $55,300 related to the
transfer and sale of a 75% interest in two communities to an unconsolidated entity as well as
$3,938 from the sales of land sites. Gains on real estate assets in discontinued operations for
the nine months ended September 30, 2007 included a gain of $16,974 from the sale of one apartment
community containing 182 apartment units. The Company may continue to be a seller of apartment
communities in future periods depending on market conditions and consistent with its investment
strategy of recycling investment capital to fund new investment activities and to provide
additional cash liquidity, as discussed in the Liquidity and Capital Resources section below.
The timing and amount of future gain recognition will fluctuate based on the size and individual
age of apartment communities sold.
For the nine months ended September 30, 2008 and 2007, gains on sales of real estate assets from
condominium sales activities represented net gains of $2,227 and $12,758, respectively. As
discussed in the consolidated financial statements, net condominium gains of $2,227 and $12,268 in
2008 and 2007, respectively, were included in continuing operations. The decrease in aggregate
condominium gains between periods primarily reflects the sales of 37 units at condominium
conversion communities in 2008 compared to 83 in 2007, and 53 units sold in 2008 compared to 91
units sold in 2007 for newly developed communities. Additionally, the decrease in condominium
profits between periods reflects lower revenue and profit margin expectations in 2008, including
the negative impact of adjusting such expectations in the second and third quarters of 2008. Lower
revenues and profit margins were driven primarily by the slowing residential housing market in 2008
resulting from tighter credit markets, an over supply of condominium units and softening general
economic conditions. The Company expects gains (losses) on condominium sales activities to
continue at a slow pace for the remainder of 2008 as the backlog of condominiums under contract
continues to be low and due to a further tightening of credit market conditions in an already slow
for-sale housing market as well as a significant expected decline in
-53-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
overall U.S. economic activity. See the Outlook section below for a discussion of expected
condominium sale closings at the Companys condominium communities.
Depreciation expense increased $380 or 0.9% from 2007 to 2008, primarily due to increased
depreciation of $1,094 related to development and lease-up communities as apartment units were
placed in service in late 2007 and early 2008, increased depreciation of $232 related to
communities that stabilized in 2007 and $902 related to one community acquired in 2007. These
increases were partially offset by a reduction in depreciation expense of approximately $466
between periods due to the acceleration of depreciation related to the retirement of six apartment
units and certain enclosed garages at a Florida community in order to accommodate an expansion of
the community in 2007, reduced depreciation of $1,155 resulting from the contribution of three
communities into an unconsolidated entity in mid to late 2007 and decreased depreciation of $284 at
commercial properties due to prior year accelerated depreciation of tenant improvements at certain
properties resulting from early terminations.
General and administrative expenses decreased $903, or 5.6%, from 2007 to 2008 primarily due to
reduced corporate governance and legal expenses of $499 due to the timing of expenses between years
and due to generally lower corporate recurring legal costs during the Companys concluded strategic
review process, reduced executive incentive compensation accruals and reduced accruals for certain
employee award programs that were eliminated as part of the Companys initiative to reduce
expenses.
Investment and development expenses decreased $864 or 15.7% from 2007 and 2008. In 2008, the
Companys development personnel and other costs increased $962 over 2007, as the Company expanded
its development pipeline in three regional markets. These cost increases were offset by $1,826 of
increased capitalization of development personnel to increasing development activity commencing in
2007 and continuing into 2008. In the absence of cost reductions, the lack of new starts will
result in lower capitalized costs to development projects and higher net investment and development
expenses in future periods.
Impairment, severance and other charges in 2008 included non-cash impairment charges of
approximately $28,947 attributable to the cessation of current development activities associated
with four pre-development projects which were written down to their estimated fair market values,
as well as the write off of capitalized pursuit costs associated with abandoned projects.
Impairment, severance and other charges in 2008 also included severance charges of $2,591
associated with the elimination of certain employment positions in the second and third quarters of
2008. The impairment and severance charges resulted from decisions to reduce the Companys
development pipeline and personnel costs after an evaluation of its current pipeline in light of
difficult market conditions and upon the conclusion of a strategic review process in the first six
months of 2008. The Company could record additional severance charges in the fourth quarter of
2008 or in future periods depending on market conditions and the Companys business plans. See
note 8 to the consolidated financial statements for further discussion. Additionally, the Company
recorded estimated casualty losses of approximately $2,764 in the third quarter of 2008, related to
damage sustained at the Companys Houston, Texas properties from Hurricane Ike in September 2008.
The Company currently estimates that these losses will be below its insured wind storm deductible.
Strategic review costs in 2008 of $8,161 were a result of the Companys formal process to pursue a
possible business combination or sale transaction. These costs generally consist of legal,
financial and other costs. The Companys Board of Directors ended the process in June 2008 due to
the increasingly difficult market environment as well as a lack of definitive proposals.
Interest expense included in continuing operations decreased $827 or 2.5% from 2007 to 2008. The
decreased expense amounts between periods primarily reflect increased interest capitalization on
the Companys development projects of $887 between periods. Interest capitalization is expected to
decrease in the fourth quarter of 2008 due to the cessation of interest capitalization on five
pre-development projects that are no longer probable of starting in the near term. Interest
expense included in discontinued operations decreased from $7,456 in 2007 to $5,697 in 2008
primarily due to interest expense associated with nine communities classified as held for sale or
sold in 2008 compared to twelve communities classified as held for sale or sold in 2007. The
Company expects interest expense in the fourth quarter of 2008 to be higher than the fourth quarter
of 2007 due to the amortization of an ineffective interest rate swap arrangement (see note 6 to the
consolidated financial statements), the increased interest costs of the FNMA variable rate debt due
to the volatility of the variable interest rate under this debt caused by current credit market
conditions, the cessation of interest capitalization on five pre-development projects that are no
longer probable of starting in the near term and the increased interest expense associated with a
new secured, fixed rate borrowing that closed early in the fourth quarter of 2008.
Equity in income of unconsolidated real estate entities decreased $135 or 11.1% from 2007 to 2008.
The decrease was primarily due to increased interest expense at two of the unconsolidated entities
that refinanced debt during the third quarter of 2008 at both a higher principal amounts and higher
interest rates as well as by the cessation of earnings from the unconsolidated entity that was
selling condominium conversion units in 2007.
-54-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
Other income (expense), net for 2008 primarily related to non-cash income related to the
mark-to-market of the Companys interest rate swap arrangement of $663 due to the ineffectiveness
of the swap in the third quarter of 2008. Other expenses in 2008 and 2007 related to estimated
state franchise and other income taxes. Franchise taxes are associated with margin-based taxes in
Texas that were effective in 2007.
Annually recurring and periodically recurring capital expenditures from continuing operations
decreased $230 or 1.8% from 2007 to 2008. The increase in annually recurring capital expenditures
of $199 primarily reflects an increase in expenditures of $322 primarily related to amenity and
breezeway upgrades as well as generally higher appliance, landscape and pool upgrade expenditures
due to the timing of such expenditures between years, partially offset by a decrease in
expenditures at three communities that were contributed to an unconsolidated entity in mid to late
2007. The decrease in periodically recurring capital expenditures of $429 primarily reflects
decreased costs associated with non-revenue generating capital expenditures at one community
incurred in conjunction with the Companys rehabilitation of the community in 2007 (approximately
$2,240), reduced expenditures at three communities contributed to unconsolidated entities in 2007
of approximately $418 and reduced expenditures for access upgrades at several communities between
years. These decreases were offset by increased capital expenditures for resident design center
costs of $1,341 as well as capital expenditures for water penetration issues at one community of
approximately $1,371. The resident design center program offers certain residents selected unit
enhancements (principally appliance upgrades, granite counter tops, closet organizers, wood
flooring and wood blinds) in return for increased rental revenues. This program started in late
2007 with a more significant roll out in 2008. Capital expenditures related to this program are
expected to continue for the remainder of 2008.
Fully Stabilized Communities
Rental and other revenues increased $3,178 or 2.1% from 2007 to 2008. This increase resulted from
a 2.1% increase in the average monthly rental rate per apartment unit. The increase in average
rental rates resulted in a revenue increase of approximately $3,009 between years. Average
economic occupancy remained relatively flat at 94.5% between periods. The occupancy change between
periods resulted in higher vacancy losses of $194 in 2008. Other property revenues increased $363
due primarily to higher utility reimbursements offset by slightly higher net concessions between
years of $248. Overall, the revenue performance of the operating portfolio for the first nine
months of 2008 reflected moderate, yet declining, market conditions
(see Company Overview and Outlook where discussed further). Average occupancy levels have
remained generally consistent between years. The Company continues to focus on maximizing rental
rates in 2008 while also maintaining a rental rate structure that enables average occupancy rates
to remain at mid-90% levels. See the Outlook section below for an additional discussion of
trends for the fourth quarter of 2008.
Property operating and maintenance expenses (exclusive of depreciation and amortization) increased
$2,144 or 3.6% from 2007 to 2008. This increase was primarily due to increased property tax
expenses of $883 or 4.3%, increased maintenance expenses of $487 or 6.9%, increased utility
expenses of $541 or 7.0% and increased personnel costs of $302 or 2.4%. Property tax expenses
increased due to increased accrual rates in 2008 resulting from actual and expected tax increases
in 2008. Maintenance expenses increased primarily due to higher interior and exterior painting
costs, partially due to the timing of the expenses between years. For the full year of 2008, the
Company expects exterior painting expenses to be somewhat higher compared to 2007. Utility costs
increased primarily due to generally higher utility rates and due to the expiration in early 2008
of a favorable pricing program in Texas. Personnel costs increased primarily due to annual salary
increases effective in January each year.
Discontinued Operations
In accordance with SFAS No. 144, the operating results and gains and losses on property sales of
real estate assets designated as held for sale are included in discontinued operations in the
consolidated statement of operations. For the nine months ended September 30, 2008, income from
discontinued operations included the results of operations of one apartment community, containing
143 units, through its sale date in January 2008, one apartment community, containing 250 units,
through its sale date in August 2008 and the results of operations of seven apartment communities
classified as held for sale in 2008. For the nine months ended September 30, 2007, income from
discontinued operations included the results of operations of the seven apartment communities held
for sale at September 30, 2008, the apartment communities sold in 2008 and a condominium conversion
community and three apartment communities sold in 2007. The revenues and expenses of discontinued
operations are summarized in note 2 to the consolidated financial statements. The gains on sales
of real estate assets between periods reflect the timing and size of the communities and for-sale
condominiums sold. For the three and nine months ended September 30, 2008, the Company recognized
net gains of $23,520 and $25,831, respectively, from the sales of one apartment community in the
first quarter of 2008 and another in the third quarter of 2008. For the nine months ended
September 30, 2007, the Company recognized net gains of $16,974 from the sale of one apartment
community and net gains of $179 from a condominium conversion community included in discontinued
operations that sold out in the
-55-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
first quarter of 2007 and from a reduction of $311 warranty accruals at a second conversion
community. These gains are discussed in note 2 to the consolidated financial statements.
As discussed under Liquidity and Capital Resources, the Company expects to continue to market for
sale real estate assets as part of its overall investment strategy and to provide additional
liquidity for both development activities and operations. 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 period to period. 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.
Outlook
Statements made below may constitute forward-looking statements within the meaning of the federal
securities laws, and are based on current apartment market and general economic conditions and
litigation and other risks as outlined in the section titled Disclosure Regarding Forward-Looking
Statements above.
The Companys outlook for the fourth quarter of 2008 is based on the expectation that apartment
market fundamentals will begin to decline compared to 2007 and the
first three quarters of 2008, as a result
of declining job growth expectations and a significant slow down in overall U.S. economy.
Additionally, the Company continues to expect increased rental competition from the rental of
excess for-sale condominiums and single family inventories in some of its markets.
Rental and other revenues from fully stabilized communities are expected to decrease modestly in
the fourth quarter of 2008, compared to the fourth quarter of 2007, driven by modest reductions in
rental rates and occupancy levels. Operating expenses of fully stabilized communities are expected
to increase in the fourth quarter of 2008, compared to 2007. Other than general inflationary
increases, the Company expects property taxes to increase at higher rates. As a result,
management expects fully stabilized community net operating income to decline moderately in the
fourth quarter of 2008 compared to 2007. If the U.S. economy has entered into a recession and
economic conditions worsen, rental revenues and net operating income could be adversely affected
and reflect year over year declines.
Management expects interest expense to increase in the fourth quarter of 2008, compared to 2007,
generally due to lower interest capitalization resulting from deferral of substantive activities on
its pre-development pipeline as well as secured debt issued in October 2008, the proceeds of which
were partly invested in cash equivalents. Management also expects general and administrative
expenses and property management expenses to be modestly lower in the fourth quarter of 2008,
compared to 2007, due to workforce reductions and expense reduction initiatives that began late in
the second quarter of 2008. The Company may record additional severance charges in future periods,
depending on market conditions and the Companys business plans.
The Company sold one apartment community for gross proceeds of approximately $52,750 in October
2008, which will result in a net gain of approximately $37 million recorded in the fourth quarter
of 2008. As discussed above, the Company also continues to market for sale six other apartment
communities; although, based on current market conditions, there can be no assurance that these
assets will be sold. The Company, through a taxable REIT subsidiary, also continues to market
for-sale condominium homes in four communities, although there can be no assurance that such sales
will close. As sales close, the Company expects to realize net accounting gains in the fourth
quarter of 2008 from apartment community and condominium sales. In
addition, should the Company refinance certain indebtedness, it may
result in prepayment penalties and other charges being recorded in
the fourth quarter of 2008.
As discussed above, the Company has deferred substantive activities on its pre-development pipeline
and management believes that the timing of future development starts will depend largely on the
stabilization of capital market conditions and the U.S. economy. Until such time as substantive
development activities on its pre-development pipeline re-commence or certain land positions are
sold, the Company expects that operating results will be adversely impacted by costs of carrying
land held for future development or sale (primarily interest and real estate tax expenses).
Liquidity and Capital Resources
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 Companys net cash flow from operating activities increased from $78,214 for the first nine
months of 2007 to $79,318 in the first nine months of 2008 primarily due to favorable changes in
the working capital components (primarily larger increases in accounts
-56-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
payable and accrued expenses due to the timing of payments between periods as well as the accrual
of severance and hurricane casualty losses in 2008) included in
operating activities, offset somewhat by the payment of strategic
review costs of approximately $7,500 in 2008. The Company expects
cash flows from operating activities to be lower for the full year of 2008 compared to 2007 primarily given the
strategic review costs incurred to date and the expected costs associated with employee severance
arrangements, hurricane casualty losses and the expected moderate decline in the operating
performance of the Companys fully stabilized properties.
Net cash flows from investing activities decreased from net cash used of $54,221 in the first nine
months of 2007 to net cash provided of $167 in the first nine months of 2008 primarily due to
reduced spending on investment and development activities in 2008 resulting from reduced
acquisitions of land for development and the 2007 acquisition of an apartment community for
approximately $75,500. The reduced expenditures were partially offset by reduced net proceeds of
real estate asset sales in 2008 as well as reduced distributions from unconsolidated entities in
2008. Proceeds from sales of real estate assets were higher in 2007 primarily due to the sales of
an apartment community, a 75% interest in two apartment communities and land sites in 2007 compared
to the sale of two apartment communities and the collection of net cash proceeds of approximately
$67,000, held by an exchange intermediary at December 31, 2007, in 2008. Distributions from
unconsolidated entities were higher in 2007 due to distributions made to the Company upon formation
of an unconsolidated entity in May 2007. For the remainder of 2008, the Company expects its
development spending to increase as it completes its existing development projects. Future
development starts will be dependant on market conditions and the availability of joint venture
equity and construction financing. As of September 30, 2008, the Company had seven apartment
communities held for sale as well as condominium units for sale. The Company currently plans to
principally reinvest the proceeds from these sales in its development communities, repay debt and
provide additional liquidity for general corporate purposes; although, there can be no
assurance that proceeds will be realized or used for these intended purposes.
Net cash flows used in financing activities increased from $25,013 in the first nine months of 2007
to $86,699 in the first nine months of 2008 primarily due to larger net borrowings in 2007 to fund
acquisition related activities. For the remainder of 2008, the Company expects that its outstanding debt may
increase modestly, depending on the level of potential asset sales, 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 for the remainder of 2008. 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 Companys 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 annually recurring,
periodically recurring and corporate capital expenditures. These operating capital expenditures
are the capital expenditures necessary to maintain the earnings capacity of the Companys operating
assets over time.
For the nine months ended September 30, 2008, the Companys net cash flow from operations, reduced
by annual operating capital expenditures and for favorable changes in the working capital
components of operating cash flow, was not sufficient to fully fund the Companys current level of
dividend payments to common and preferred shareholders by approximately $18,000, including the
impact of costs associated with the recently concluded strategic review process. The Company used
line of credit borrowings and proceeds from asset sales to fund the additional cash flow necessary
to satisfy the Companys quarterly dividend to common shareholders of $0.45 per share. The
Companys net cash flow from operations continues to be sufficient to meet the dividend
requirements necessary to maintain its REIT status under the Code.
The Companys quarterly dividend payment rate to common shareholders has been $0.45 per share for each quarter of 2008.
At this dividend rate, the Company expects that net cash flows from operations reduced by annual
operating capital expenditures will not be sufficient to fund the dividend payments to common and
preferred shareholders. To the extent the historical dividend is
maintained, the Company would intend to use primarily line of credit borrowings and the
proceeds from 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
communities (discussed below) and the short-term negative impact of apartment rehabilitation and
lease-up activities and strategic review costs incurred in connection with the Companys recently concluded strategic review process,
no longer underway, to seek a potential sale of the Company. The Companys board of directors
reviews the dividend quarterly, and there can be no assurance that the current dividend level will
be maintained in future periods.
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
-57-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
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 Companys revolving lines of credit as of October 31, 2008 was created primarily through
the Companys asset sales program and secured financings. 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 communities, 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 Companys strategy is to pursue construction loan financing and joint venture equity
to fund future development starts that are in pre-development. At present, the Company has
deferred substantive activities on its pre-development pipeline and management believes that the
timing of future development starts will depend largely on the stabilization of capital market
conditions and the U.S. economy, which it believes will influence conditions in employment and the
local real estate markets, the Companys ability to generate asset sales proceeds and its ability
to attract potential construction loan financing and joint venture equity to fund future
development.
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 has instituted an active asset sale
and capital recycling program as a means to fund its on-going community development and acquisition
program. In the first nine months of 2008, the Company generated net proceeds of approximately
$57,279 from the sales of two apartment communities, and has sold another apartment community in
October which generated net proceeds of approximately $52,236. The Company is currently marketing
for sale three Atlanta, Georgia communities, two New York City communities and one greater
Washington D.C. community as well as condominium homes. Current deteriorating conditions in the global capital markets and the U.S. economy may adversely affect the Companys ability to sell assets. As previously discussed, the Company
currently expects to use asset sale proceeds to fund its committed investments, repay debt, pay
potential special dividends, if necessary, or possibly to repurchase shares of its stock. There
can be no assurance that assets will be sold, gross proceeds will be realized or used for the
purposes intended.
In August 2008, two unconsolidated entities completed the refinancing of their mortgage notes that
were scheduled to mature in late in 2008 and in 2009. For the fourth quarter of 2008, the Company
has no remaining scheduled maturities of consolidated unsecured or secured indebtedness. In 2009,
principal payments under amortizing debt arrangements plus scheduled debt maturities total
approximately $76,618. In addition, in July 2009, the Companys interest rate swap arrangement
expires relating to the $92,275 in outstanding FNMA taxable bonds that mature in 2029. At that
time, the Company will be required to replace the existing interest rate swap with a new interest
rate hedge arrangement with a 5-year term. As of that same date, the Company also has the option
of pre-paying the FNMA loan.
At September 30, 2008, the Company had approximately $125,882 borrowed under its $630,000 combined
unsecured line of credit facilities. The credit facilities mature in April 2010, but the $600,000 facility contains a
one-year extension to April 2011 at the Companys option. The terms, conditions and restrictive
covenants associated with the Companys lines of credit facilities are summarized in note 4 to the
consolidated financial statements. Management believes the Company was in compliance with the
covenants of the Companys credit facility arrangements at September 30, 2008.
As of September 30, 2008, the Companys aggregate pipeline of development projects under
construction totaled approximately $541,500 (including the Companys share, net of joint venture
partner interests, of $507,200). As of the same date, approximately $266,700 of estimated
construction costs remained to be funded by the Company (or approximately $219,000, excluding
committed construction loan financing and escrow deposits held by the construction lender).
Subsequent to quarter end, in October 2008, the Company closed six, cross-collateralized secured
mortgage loans. The mortgage loans have an aggregate principal amount of approximately $184,683,
require fixed, interest-only, payments at 6.09% and mature in six years in November 2014. The
mortgage loans are also pre-payable without penalty beginning after October 2012. In addition,
the Company closed the sale of one apartment community as discussed above. The net proceeds of
these transactions were used to pay down the Companys unsecured lines of credit and to invest in
short-term cash equivalents.
As of October 31, 2008, outstanding borrowings on the Companys combined $630,000 lines of credit
totaled approximately $29,600, and available cash equivalents totaled approximately $110,000.
Management believes that it will have adequate capacity under its revolving lines of credit
together with available cash and cash equivalents to execute its near-term business plan and meet
its short-term liquidity requirements as discussed above.
-58-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
Stock Repurchase Program
In the fourth quarter of 2006, the Companys board of directors adopted a 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. During the first nine months of 2008, the Company did
not repurchase any shares under this program. During 2007, the Company repurchased 83 shares of
common stock totaling approximately $3,694 under this program.
Capitalization of Fixed Assets and Community Improvements
The Company has a policy of capitalizing those expenditures relating to the acquisition of new
assets and the development, construction and rehabilitation of apartment and condominium
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 the interior and exterior painting of
operating communities, except such costs at communities under major rehabilitation programs.
In conjunction with acquisitions of existing communities, it is the Companys policy to provide in
its acquisition budgets adequate funds to complete any deferred maintenance items and to otherwise
make the communities acquired competitive with comparable newly-constructed communities. In some
cases, the Company will provide in its acquisition budgets additional funds to upgrade or otherwise
improve new acquisitions. Such costs are generally capitalized as costs of the acquired
communities, when identified and included as part of an approved capital budget at the time of
acquisition and when incurred during the twelve months subsequent to the acquisition date.
The Company capitalizes interest, real estate taxes, and certain internal personnel and associated
costs related to apartment and condominium communities under development, construction, and major
rehabilitation. The internal personnel and associated costs are capitalized to the projects under
development based upon the effort identifiable with such projects. The Company treats each unit in
an apartment and condominium community separately for cost accumulation, capitalization and expense
recognition purposes. Prior to the commencement of leasing and sales activities, interest and
other construction costs are capitalized and are reflected on the balance sheet as 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 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 and property management and leasing personnel expenses) of such communities.
-59-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
Acquisition of assets and community development and other capitalized expenditures for the three
and nine months ended September 30, 2008 and 2007 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
New
community development and acquisition expenditures (1) |
|
$ |
35,893 |
|
|
$ |
175,921 |
|
|
$ |
116,506 |
|
|
$ |
242,541 |
|
Periodically recurring capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community rehabilitation and other revenue
generating improvements (2) |
4,603 |
|
|
|
3,440 |
|
|
|
12,554 |
|
|
|
10,646 |
|
Other community additions and improvements (3) |
|
|
1,783 |
|
|
|
1,756 |
|
|
|
5,114 |
|
|
|
5,623 |
|
Annually recurring capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carpet replacements and other community additions
and improvements (4) |
2,953 |
|
|
|
2,735 |
|
|
|
8,592 |
|
|
|
8,815 |
|
Corporate additions and improvements |
|
|
191 |
|
|
|
324 |
|
|
|
613 |
|
|
|
1,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
45,423 |
|
|
$ |
184,176 |
|
|
$ |
143,379 |
|
|
$ |
269,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest |
|
$ |
2,875 |
|
|
$ |
2,864 |
|
|
$ |
9,546 |
|
|
$ |
8,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized development and associated costs (5) |
|
$ |
1,247 |
|
|
$ |
1,264 |
|
|
$ |
4,575 |
|
|
$ |
2,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects aggregate land and community development and acquisition costs,
exclusive of the change in construction payables between years. |
|
(2) |
|
Represents expenditures for major community rehabilitations and other unit
upgrade costs that enhance the rental value of such units. |
|
(3) |
|
Represents property improvement expenditures that generally occur less
frequently than on an annual basis. |
|
(4) |
|
Represents property improvement expenditures of a type that are expected to be
incurred on an annual basis. |
|
(5) |
|
Reflects internal personnel and associated costs capitalized to construction
and development activities. |
The Company is currently undertaking substantial renovations and re-leasing of two apartment
communities, Post Peachtree Hills® in Atlanta, Georgia and Post Heights in Dallas, Texas,
containing a total of 668 units. The total projected rehabilitation capital cost of these projects
is approximately $21,300. The Company believes that the long-term value of these communities will
be enhanced as a result of the renovations; however, operating results at these communities is
affected negatively by increased vacancy during the renovation period. The renovation of these
communities began earlier in 2008. As of September 30, 2008, the Company had completed the
renovation of 298 units (44.6% of the total) at these communities.
In addition, the Company is underway with an initiative to engage third-party engineers and
consultants to inspect and evaluate each of its communities that have stucco exteriors or exterior
insulation finishing systems (EIFS) for potential water penetration and other related issues. At
this early stage of the process, the Company has preliminarily determined that varying levels of
remediation and improvements may be required to be performed at approximately 30 properties in its
portfolio containing a total of approximately 11,000 units. The Company preliminarily estimates
that the aggregate cost of this initiative could be in the range of $40,000 to $45,000 to complete
the scope of the remediation and improvements, although the scope and cost will vary considerably
among individual properties. The work is currently expected to be completed between now and the
end of 2010 and may include, but not be limited to, remediation, improvements and replacements of
exterior stucco and EIFS siding, windows and doors, roofing and gutters, exterior sealants and
coatings. There can be no assurance that the scope of work or the Companys preliminary estimates
of costs will not change in the future. The component cost of the remediation, improvements and
replacements will either be capitalized or expensed as incurred in accordance with the Companys
normal accounting policy for capitalization of fixed assets (see
Capitalization of Fixed Assets and Community Improvements
above for further discussion). In addition, as a result of the scope of this
work, if the Company should be required to retire existing components of fixed assets on its
consolidated balance sheet, it could result in acceleration of depreciation or other charges in
subsequent periods relating to the undepreciated portion of these components. At this early stage
of the process, however, it is not possible to estimate the potential impact on the Companys
financial position and results of operations in subsequent periods other than as discussed above.
-60-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
Current Development Activity
At September 30, 2008, the Company had five communities containing 1,736 apartment units and 276
for-sale condominiums in two communities under development. These communities are summarized in
the table below ($ in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Incurred |
|
|
|
|
|
Number |
|
|
|
|
|
|
Company |
|
|
Estimated |
|
|
Share of |
|
|
as of |
|
Community |
|
Location |
|
of Units |
|
|
Retail Sq. Ft. |
|
|
Ownership |
|
|
Cost |
|
|
Est. Cost |
|
|
09/30/08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Company Share) |
Apartments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post Alexander |
|
Atlanta, GA |
|
|
307 |
|
|
|
|
|
|
|
100 |
% |
|
$ |
59.4 |
|
|
$ |
59.4 |
|
|
$ |
56.2 |
|
Post Eastside |
|
Dallas, TX |
|
|
435 |
|
|
|
37,900 |
|
|
|
100 |
% |
|
|
56.7 |
|
|
|
56.7 |
|
|
|
40.9 |
|
Post Frisco Bridges |
|
Dallas, TX |
|
|
269 |
|
|
|
29,000 |
|
|
|
100 |
% |
|
|
41.3 |
|
|
|
41.3 |
|
|
|
18.8 |
|
Post Park® |
|
Wash. DC |
|
|
396 |
|
|
|
1,700 |
|
|
|
100 |
% |
|
|
84.7 |
|
|
|
84.7 |
|
|
|
37.0 |
|
Post West Austin |
|
Austin, TX |
|
|
329 |
|
|
|
|
|
|
|
100 |
% |
|
|
53.2 |
|
|
|
53.2 |
|
|
|
25.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apartments |
|
|
|
|
1,736 |
|
|
|
68,600 |
|
|
|
|
|
|
$ |
295.3 |
|
|
$ |
295.3 |
|
|
$ |
178.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condominiums: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Ritz-Carlton
Residences, Atlanta,
Buckhead (4) |
|
Atlanta, GA |
|
|
129 |
(5) |
|
|
|
|
|
|
62.5 |
%(4) |
|
$ |
112.7 |
|
|
$ |
78.4 |
|
|
$ |
26.9 |
|
Four Seasons Residences |
|
Austin, TX |
|
|
147 |
(5) |
|
|
8,000 |
|
|
|
100 |
% |
|
|
133.5 |
|
|
|
133.5 |
|
|
|
35.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Condominiums |
|
|
|
|
276 |
|
|
|
8,000 |
|
|
|
|
|
|
$ |
246.2 |
|
|
$ |
211.9 |
|
|
$ |
62.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
|
Quarter |
|
Quarter of |
|
Quarter of |
|
|
|
|
|
Units |
|
|
|
|
of Const. |
|
First Units |
|
Stabilized |
|
Units |
|
Under |
|
Units |
Community |
|
Start |
|
Available |
|
Occupancy(1) |
|
Leased(2) |
|
Contract(3) |
|
Closed(2) |
Apartments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post Alexander |
|
|
2Q 2006 |
|
|
|
1Q 2008 |
|
|
|
2Q 2009 |
|
|
|
143 |
|
|
|
N/A |
|
|
|
N/A |
|
Post Eastside |
|
|
4Q 2006 |
|
|
|
2Q 2008 |
|
|
|
4Q 2009 |
|
|
|
107 |
|
|
|
N/A |
|
|
|
N/A |
|
Post Frisco Bridges |
|
|
3Q 2007 |
|
|
|
1Q 2009 |
|
|
|
2Q 2010 |
|
|
|
|
|
|
|
N/A |
|
|
|
N/A |
|
Post Park® |
|
|
4Q 2007 |
|
|
|
1Q 2009 |
|
|
|
3Q 2010 |
|
|
|
|
|
|
|
N/A |
|
|
|
N/A |
|
Post West Austin |
|
|
4Q 2007 |
|
|
|
1Q 2009 |
|
|
|
1Q 2010 |
|
|
|
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Apartments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condominiums: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Ritz-Carlton
Residences, Atlanta,
Buckhead (4) |
|
|
3Q 2007 |
|
|
|
4Q 2009 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
Four Seasons Residences |
|
|
1Q 2008 |
|
|
|
4Q 2009 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Condominiums |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company defines stabilized occupancy as the earlier to occur of (i) the
attainment of 95% physical occupancy on the first day of any month or (ii) one year
after completion of construction. |
|
(2) |
|
As of October 27, 2008. |
|
(3) |
|
As of October 27, 2008, represents the total number of units under contract for sale
upon completion and delivery of the units. There can be no assurance that condominium
units under contract will close. |
|
(4) |
|
The amounts reflected for this project represent the condominium portion of a
mixed-use development currently being developed in an entity owned with other
third-party developers. The condominium portion of the project is owned through a
joint venture with an Atlanta-based condominium development partner and is branded as
The Ritz-Carlton Residences, Atlanta, Buckhead. See note 3 to the consolidated
financial statements for further information related to this venture. |
|
(5) |
|
Due to the combination of certain contiguous units, the aggregate unit count was
reduced from 137 to 129 units for the Ritz-Carlton Residences and 168 units to 147
units for the Four Seasons Residences. |
After an evaluation of its development pipeline and market conditions in the second quarter of
2008, the Company decided to defer further activities on four of its development projects: Allen
Plaza I in Atlanta, Georgia, the third phase of Post Lake® at Baldwin Park in Orlando, Florida,
Post Soho Square in Tampa, Florida, and Post Walk® at Citrus Park Village in Tampa, Florida which
is also currently held for sale. The Company also decided to abandon the pursuit of its Post Plaza
South development project in Charlotte, North Carolina and to terminate its purchase contract to
acquire that site. The total projected development costs of these projects totaled more than
$430,000. As a result of these decisions, the Company recognized non-cash impairment charges of
approximately $28,947 for the nine months ended September 30, 2008 attributable to the substantial
cessation of these development activities, specifically to write down these projects to their estimated fair market values as well as to write
off capitalized pursuit costs associated with certain abandoned projects.
-61-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
In response to deteriorating conditions in the global capital markets and the U.S. economy
discussed above, the Company has also deferred substantive activities on its pre-development
pipeline totaling six projects, including: Post South Lamar in Austin, Texas, Post Morningside in
Charlotte, North Carolina, Post Midtown Square® III and Post Richmond in Houston, Texas, Post
Parkside at Wade I in Raleigh, North Carolina and Post Carlyle Square II in Alexandria, Virginia.
The total projected development costs of these projects totaled approximately $380,000. At
present, management believes that the timing of future development starts will depend largely on
the stabilization of capital market conditions and the U.S. economy, which it believes will
influence conditions in employment and the local real estate markets, the Companys ability to
generate asset sales proceeds and its ability to attract potential construction loan financing and
joint venture equity to fund future development. Until such time as substantive development
activities re-commence or certain land positions are sold, the Company expects that operating
results will be adversely impacted by costs of carrying land held for future development or sale.
Inflation
Substantially all of the leases at the communities allow, at the time of renewal, for adjustments
in the rent payable thereunder, and thus may enable the Company to seek increases in rents. The
substantial majority of these leases are for one year or less and the remaining leases are for up
to two years. At the expiration of a lease term, the Companys lease agreements generally provide
that the term will be extended unless either the Company or the lessee gives at least sixty (60)
days written notice of termination. In addition, the Companys policy generally permits the earlier
termination of a lease by a lessee upon thirty (30) days written notice to the Company and the
payment of an amount equal to two months rent as compensation for early termination. The
short-term nature of these leases generally serves to reduce the risk to the Company of the adverse
effect of inflation.
Funds from Operations
The Company uses the National Association of Real Estate Investment Trusts (NAREIT) definition of
funds from operations (FFO). FFO is defined by NAREIT as net income available to common
shareholders determined in accordance with GAAP, excluding gains (or losses) from extraordinary
items and sales of depreciable operating property, plus depreciation of real estate assets, and
after adjustment for unconsolidated partnerships and joint ventures all determined on a consistent
basis in accordance with GAAP. FFO is a supplemental non-GAAP financial measure. FFO presented
herein is not necessarily comparable to FFO presented by other real estate companies because not
all real estate companies use the same definition. The Companys FFO is comparable to the FFO of
real estate companies that use the current NAREIT definition.
The Company also uses FFO as an operating measure. Accounting for real estate assets using
historical cost accounting under GAAP assumes that the value of real estate assets diminishes
predictably over time. NAREIT stated in its April 2002 White Paper on Funds from Operations since
real estate asset values have historically risen or fallen with market conditions, many industry
investors have considered presentations of operating results for real estate companies that use
historical cost accounting to be insufficient by themselves. As a result, the concept of FFO was
created by NAREIT for the REIT industry to provide an alternate measure. Since the Company agrees
with the concept of FFO and appreciates the reasons surrounding its creation, management believes
that FFO is an important supplemental measure of operating performance. In addition, since most
equity REITs provide FFO information to the investment community, the Company believes FFO is a
useful supplemental measure for comparing the Companys results to those of other equity REITs.
The Company believes that the line on the Companys consolidated statement of operations entitled
net income available to common shareholders is the most directly comparable GAAP measure to FFO.
FFO should not be considered as an alternative to net income available to common shareholders
(determined in accordance with GAAP) as an indicator of the Companys financial performance. While
management believes that FFO is an important supplemental non-GAAP financial measure, management
believes it is also important to stress that FFO should not be considered as an alternative to cash
flow from operating activities (determined in accordance with GAAP) as a measure of the Companys
liquidity. Further, FFO is not necessarily indicative of sufficient cash flow to fund all of the
Companys needs or ability to service indebtedness or make distributions.
-62-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
A reconciliation of net income (loss) available to common shareholders and unitholders to FFO is
provided below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income (loss) available to common shareholders |
|
$ |
25,167 |
|
|
$ |
9,140 |
|
|
$ |
(1,029 |
) |
|
$ |
93,729 |
|
Minority
interest of common unitholders
continuing operations |
|
|
(14 |
) |
|
|
41 |
|
|
|
(298 |
) |
|
|
923 |
|
Minority interest in discontinued operations (1) |
|
|
212 |
|
|
|
66 |
|
|
|
290 |
|
|
|
446 |
|
Depreciation on consolidated real estate assets |
|
|
14,569 |
|
|
|
16,306 |
|
|
|
45,851 |
|
|
|
49,319 |
|
Depreciation on real estate assets held in
unconsolidated entities |
|
|
347 |
|
|
|
322 |
|
|
|
1,042 |
|
|
|
822 |
|
Gains on sales of real estate assets |
|
|
(23,996 |
) |
|
|
(5,372 |
) |
|
|
(28,058 |
) |
|
|
(85,031 |
) |
Incremental gains on condominium sales, net of
Incremental gains (losses) on condominium sales (2) |
|
|
(149 |
) |
|
|
3,376 |
|
|
|
(393 |
) |
|
|
6,540 |
|
Gains on sales of real estate assets unconsolidated
entities |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
(171 |
) |
Incremental
gains on condominium sales
unconsolidated entities (2) |
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations available to common
shareholders and unitholders (3) |
|
$ |
16,136 |
|
|
$ |
23,875 |
|
|
$ |
17,405 |
|
|
$ |
66,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
44,047 |
|
|
|
43,524 |
|
|
|
43,976 |
|
|
|
43,452 |
|
Weighted average shares and units outstanding basic |
|
|
44,340 |
|
|
|
44,133 |
|
|
|
44,306 |
|
|
|
44,087 |
|
Weighted average shares outstanding diluted (4) |
|
|
44,182 |
|
|
|
44,101 |
|
|
|
44,251 |
|
|
|
44,166 |
|
Weighted average shares and units outstanding diluted (4) |
|
|
44,475 |
|
|
|
44,709 |
|
|
|
44,581 |
|
|
|
44,801 |
|
|
|
|
(1) |
|
Represents the minority interest in earnings and gains on properties held for sale and sold
reported as discontinued operations for the periods presented. |
|
(2) |
|
For conversion projects, the Company recognizes incremental gains on condominium sales in
FFO, net of provision for income taxes, to the extent that net sales proceeds from the sale of
condominium units exceeds the greater of their fair value or net book value as of the date the
property is acquired by its taxable REIT subsidiary. For development projects, gains on
condominium sales in FFO are equivalent to gains reported under GAAP. |
|
(3) |
|
For the nine months ended September 30, 2008, FFO included $8,161 of strategic review costs
associated with the Companys initiation of a formal process to pursue a possible business
combination or other sale transaction. FFO also included $5,002 and $34,302, respectively,
for the three and nine months ended September 30, 2008 for impairment, severance charges. For
the nine months ended September 30, 2007, FFO included gains on land sales of $3,938. |
|
(4) |
|
Funds from operations per share were computed using weighted average shares and units
outstanding, including the impact of dilutive securities totaling 135 and 275 shares and units
for the three and nine months ended September 30, 2008, respectively. Such dilutive securities
were antidilutive to the income (loss) per share computations for the nine months ended
September 30, 2008 under generally accepted accounting principles for such period. |
-63-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Companys primary market risk exposure is interest rate risk. At September 30, 2008, the
Company had $125,882 of variable rate debt tied to LIBOR and $92,275 of variable rate debt based on
a weekly remarketed rate. In addition, the Company has interest rate risk associated with fixed
rate debt at maturity. The discussion in this Interest Rate Sensitivity section is the same for
the Company and the Operating Partnership, except that all indebtedness described herein has been
incurred by the Operating Partnership.
Management has and will continue to manage interest rate risk as follows:
|
|
maintain a conservative ratio of fixed rate, long-term debt to total debt such that
variable rate exposure is kept at an acceptable level; |
|
|
fix certain long-term variable rate debt through the use of interest rate swaps or interest
rate caps with appropriately matching maturities; |
|
|
use treasury locks where appropriate to fix rates on anticipated debt transactions; and |
|
|
take advantage of favorable market conditions for long-term debt and/or equity. |
Management uses various financial models and advisors to achieve these objectives.
The table below provides information, including fair value measured in accordance with the
guidelines established in SFAS No. 157, about the Companys derivative financial instruments that
are sensitive to changes in interest rates. For the Companys interest rate swap arrangement, the
table presents notional amounts and weighted average interest rates by (expected) contractual
maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged
under the contract.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Average |
|
Expected |
|
|
|
Interest Rate Derivatives |
|
Notional Amount |
|
Pay Rate/Cap Rate |
|
Receive Rate |
|
Settlement Date |
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
Asset (Liab.) |
|
Interest Rate Swap (variable to fixed) |
|
$95,600 amortizing to $90,270 |
|
5.21% |
|
1 month LIBOR |
|
7/31/09 |
|
$ |
(1,526 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,526 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
As more fully described in note 6 to the consolidated financial statements, the interest rate swap
arrangement is carried on the consolidated balance sheet at the fair value shown above in
accordance with SFAS No. 133, as amended and SFAS No. 157. If interest rates under the Companys
floating rate LIBOR-based and weekly remarketed borrowings fluctuated by 1.0%, interest costs to
the Company, based on outstanding borrowings at September 30, 2008, would increase or decrease by
approximately $2,181 on an annualized basis.
During the third quarter of 2008, the interest rate swap arrangement, previously accounted for as a
cash flow hedge, became ineffective under generally accepted accounting principles (SFAS No. 133,
as amended). As a result, the gross increase in the market value of the interest rate swap
arrangement for the three months ended September 30, 2008 of $663 was recognized in other income in
the consolidated statement of operations. In addition, under SFAS No. 133, as amended, the Company
is required to amortize into expense the cumulative unrecognized loss on the interest rate swap of
$2,189, previously included in shareholders equity, over the remaining life of the swap through
2009. Total amortization expense related to this swap was $508 for the three and nine months ended
September 30, 2008.
On February 1, 2008, a $28,495 interest rate cap arrangement expired on its maturity date with no
change in value from December 31, 2007.
ITEM 4. CONTROLS AND PROCEDURES
As required by Securities and Exchange Commission rules, the Company has evaluated the
effectiveness of the design and operation of its disclosure controls and procedures as of the end
of the period covered by this quarterly report on Form 10-Q. This evaluation was carried out under
the supervision and with the participation of the Companys management, including its principal
executive officer and principal financial officer. Based on this evaluation, these officers have
concluded that the design and operation of the Companys disclosure controls and procedures were
effective as of the end of the period covered by this quarterly report on Form 10-Q. Disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934 as amended (the Exchange Act)) are the Companys controls and other procedures that
are designed to ensure that information required to be disclosed by the Company in the reports that
it files or submits under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commissions rules and forms.
-64-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
There were no changes to the Companys internal controls over financial reporting (as defined in
Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that
materially affected, or are reasonably likely to materially affect, the Companys internal control
over financial reporting.
ITEM 4T. CONTROLS AND PROCEDURES
As required by Securities and Exchange Commission rules, the Operating Partnership has evaluated
the effectiveness of the design and operation of its disclosure controls and procedures as of the
end of the period covered by this quarterly report on Form 10-Q. This evaluation was carried out
under the supervision and with the participation of the management of the general partner of the
Operating Partnership, including its principal executive officer and principal financial officer.
Based on this evaluation, these officers have concluded that the design and operation of the
Operating Partnerships disclosure controls and procedures were effective as of the end of the
period covered by this quarterly report on Form 10-Q. Disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended (the
Exchange Act)) are the Operating Partnerships controls and other procedures that are designed to
ensure that information required to be disclosed by the Operating Partnership in the reports that
it files or submits under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commissions rules and forms.
There were no changes to the Operating Partnerships internal controls over financial reporting (as
defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this
report that materially affected, or are reasonably likely to materially affect, the Operating
Partnerships internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 2006, the Equal Rights Center (ERC) 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 (FHA) and the Americans with
Disabilities Act (ADA) 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, 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 FHA and
the ADA and prohibiting construction or sale of noncompliant units or complexes. On April 18,
2007, ERC filed a motion for a preliminary injunction to prohibit the Company and the Operating
Partnership from selling any alleged noncompliant apartment communities or condominium units
while the litigation is ongoing. On July 25, 2007 the court entered an order denying ERCs
motion for the preliminary injunction. Fact discovery is mostly completed by both parties, and
the parties exchanged affirmative expert reports on July 8, 2008. On August 1, 2008, ERC
disclosed an alleged $9 million dollar damages assessment for a
portion of the compensatory damages claimed.
On August 12, 2008, the Company and the Operating Partnership filed a motion to strike all
evidence regarding that new assessment. A hearing on that motion will be held on December 9,
2008. The parties exchanged expert rebuttal reports on October 3, 2008. Expert discovery is
scheduled to be completed by November 18, 2008, and the last briefing on dispositive motions is
due by February 3, 2009. It is possible that these dates could be further extended. At this
stage in the proceeding, it is not possible to predict or determine the outcome of the lawsuit,
nor is it possible to estimate the amount of loss 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 Companys results of operations or financial position.
-65-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
ITEM 1A. RISK FACTORS
The credit crisis and a recent rise in mortgage qualification requirements may affect the Companys
financial condition and results of operations.
The current instability and tightening in the credit markets has led to an increase in spreads and
pricing of secured and unsecured debt. The effect of a prolonged tightening in the credit markets
could negatively impact the Companys ability to borrow and refinance existing borrowings at
acceptable rates or at all. Further, with respect to potential condominium home purchasers, there
has been a decrease in the type of mortgage products available and a significant increase in the
qualification requirements for new mortgages. The difficulty that potential condominium home
buyers may have obtaining financing may result in a significant decrease in demand for the
Companys condominium units, which may materially adversely affect the Companys operations and
financial results, and the duration and severity of the effects are uncertain.
The economic slowdown in the U.S. and the decline in the condominium and single family housing
markets have affected and may continue to affect the Companys financial condition and results of
operations.
The significant decline in economic growth, both in the U.S. and globally, in the second half of
2008 has led to the U.S. economy bordering on recession. The trends in both the real estate
development industry and the U.S. economy continue to be unfavorable. These trends affect the
Companys for-sale housing revenues as well as its revenues from the Companys apartment
communities. The Companys apartment communities compete with more affordable apartments in most
markets. The Companys ability to lease its units in these communities at favorable rates, or at
all is dependent upon the overall level of spending, which is affected by, among other things,
employment levels, recession, personal debt levels, the recent slowdown in the housing market,
stock market volatility and uncertainty about the future. The Company may be disproportionately
vulnerable to reduced spending arising from this overall downturn than owners of lower cost
apartment communities. The rental of excess for-sale condominiums in an already competitive
multifamily market may also reduce the Companys ability to lease its apartment units and depress
rental rates in certain markets. The excess in for-sale condominiums in the Companys markets also
affects the Companys profits in its for-sale condominium business. The market for the Companys
for-sale condominium homes depends on an active demand for new for-sale housing and high consumer
confidence. Continuing decline in demand, exacerbated by tighter credit standards for home buyers,
has led to an oversupply of new for-sale housing that affects the price at which the Company is
able to sell condominium homes and the number of condominium communities that the Company is able
to develop in the future. In an effort to reduce its unsold inventory, the Company has implemented
reduced pricing programs which have also resulted in lower condominium profits for 2008. The
Company cannot predict how long demand and other factors in the real estate market will remain
unfavorable, but if the markets continue to be weak or deteriorate further, the pace of condominium
sales and closings may continue to be slow for the remainder of 2008 and into 2009.
The Company may not be able to maintain its current dividend level.
The Companys quarterly dividend payment rate to common shareholders has been $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 2008 would not be sufficient to fund the dividend
payments to common and preferred shareholders in the near term. To the extent the historical
common stock dividend level is maintained in the fourth quarter of 2008, the Company would intend
to use primarily line of credit borrowings and apartment community and condominium sales to fund
the additional cash flow necessary to fully fund the dividend payments to common shareholders. The
Companys board of directors reviews the
dividend quarterly, and there can be no assurance that the current dividend level will be
maintained in future periods.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) |
|
through (b) None |
|
(c) |
|
The following table summarizes the Companys purchases of its equity securities for the three
months ended September 30, 2008 (in thousands, except per share amounts). |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
|
Value of Shares that May |
|
|
|
Total Number of |
|
|
Average Price Paid |
|
|
Announced Plans or |
|
|
Yet Be Purchased Under |
|
Period |
|
Shares Purchased |
|
|
Per Share |
|
|
Programs |
|
|
the Plans or Programs(1) |
|
July 1, 2008 to
July 31, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
196,300 |
|
August 1, 2008 to
August 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
196,300 |
|
September 1, 2008 to
September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
196,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
196,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In the fourth quarter of 2006, the Companys board of directors approved a
stock repurchase program under which the Company may repurchase up to $200,000
of common or preferred stock through December 31, 2008. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
-66-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
ITEM 6. EXHIBITS
Certain exhibits required by Item 601 of Regulation S-K have been filed with previous reports by
the Registrants and are incorporated by reference herein.
The Registrants agree to furnish a copy of all agreements relating to long-term debt upon request
of the SEC.
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
|
3.1(a)
|
|
|
|
Articles of Incorporation of the Company |
|
|
|
|
|
3.2(b)
|
|
|
|
Articles of Amendment to the Articles of Incorporation of the Company |
|
|
|
|
|
3.3(b)
|
|
|
|
Articles of Amendment to the Articles of Incorporation of the Company |
|
|
|
|
|
3.4(b)
|
|
|
|
Articles of Amendment to the Articles of Incorporation of the Company |
|
|
|
|
|
3.5(c)
|
|
|
|
Articles of Amendment to the Articles of Incorporation of the Company |
|
|
|
|
|
3.6(d)
|
|
|
|
Bylaws of the Company (as Amended and Restated as of March 14, 2008) |
|
|
|
|
|
4.1(e)
|
|
|
|
Indenture between the Company and SunTrust Bank, as Trustee |
|
|
|
|
|
4.2(e)
|
|
|
|
Form of First Supplemental Indenture to the Indenture between the Company and SunTrust Bank, as Trustee |
|
|
|
|
|
10.1(f)
|
|
|
|
Second Amendment, dated September 8, 2008, to the Amended and Restated Credit Agreement, dated April 28,
2006 |
|
|
|
|
|
10.2(g)
|
|
|
|
Amended and Restated Post Properties Inc. 2003 Incentive Stock Plan |
|
|
|
|
|
10.3(g)
|
|
|
|
Form of Amended and Restated Indemnification Agreement |
|
|
|
|
|
11.1(h)
|
|
|
|
Statement Regarding Computation of Per Share Earnings |
|
|
|
|
|
31.1
|
|
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended, and adopted under Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
31.2
|
|
|
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended, and adopted under Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
32.1
|
|
|
|
Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted under Section 906 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
32.2
|
|
|
|
Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted under Section 906 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
(a) |
|
Filed as an exhibit to the Registration Statement on Form S-11 (SEC File No. 33-61936), as
amended, of the Company and incorporated herein by reference. |
|
(b) |
|
Filed as an exhibit to the Annual Report on Form 10-K of the Registrants for the year ended
December 31, 2002 and incorporated herein by reference. |
|
(c) |
|
Filed as an exhibit to the Quarterly Report on Form 10-Q of the Registrants for the quarter
ended September 30, 1999 and incorporated herein by reference. |
|
(d) |
|
Filed as an exhibit to the Current Report on Form 8-K of the Registrants filed March 20, 2008
and incorporated herein by reference. |
|
(e) |
|
Filed as an exhibit to the Registration Statement on Form S-3 (SEC File No. 333-42884), as
amended, of the Company and incorporated herein by reference. |
|
(f) |
|
Filed as an exhibit to the Current Report on Form 8-K of the Registrants filed September 11,
2008 and incorporated herein by reference. |
|
(g) |
|
Filed as an exhibit to the Current Report on Form 8-K of the Registrants filed October 22,
2008 and incorporated herein by reference. |
|
(h) |
|
The information required by this exhibit is included in note 5 to the consolidated financial
statements and incorporated herein by reference. |
-67-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
POST PROPERTIES, INC.
|
|
November 7, 2008 |
By /s/ David P. Stockert
|
|
|
David P. Stockert |
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
November 7, 2008 |
By /s/ Christopher J. Papa
|
|
|
Christopher J. Papa |
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |
|
|
|
|
|
|
|
|
|
|
November 7, 2008 |
By /s/ Arthur J. Quirk
|
|
|
Arthur J. Quirk |
|
|
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer) |
|
-68-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
POST APARTMENT HOMES, L.P.
By:Post GP Holdings, Inc., its sole general partner
|
|
November 7, 2008 |
By /s/ David P. Stockert
|
|
|
David P. Stockert |
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
November 7, 2008 |
By /s/ Christopher J. Papa
|
|
|
Christopher J. Papa |
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |
|
|
|
|
|
|
|
|
|
|
November 7, 2008 |
By /s/ Arthur J. Quirk
|
|
|
Arthur J. Quirk |
|
|
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer) |
|
|
-69-
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share or unit and apartment unit data)
EXHIBIT INDEX
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
|
3.1(a)
|
|
|
|
Articles of Incorporation of the Company |
|
|
|
|
|
3.2(b)
|
|
|
|
Articles of Amendment to the Articles of Incorporation of the Company |
|
|
|
|
|
3.3(b)
|
|
|
|
Articles of Amendment to the Articles of Incorporation of the Company |
|
|
|
|
|
3.4(b)
|
|
|
|
Articles of Amendment to the Articles of Incorporation of the Company |
|
|
|
|
|
3.5(c)
|
|
|
|
Articles of Amendment to the Articles of Incorporation of the Company |
|
|
|
|
|
3.6(d)
|
|
|
|
Bylaws of the Company (as Amended and Restated as of March 14, 2008) |
|
|
|
|
|
4.1(e)
|
|
|
|
Indenture between the Company and SunTrust Bank, as Trustee |
|
|
|
|
|
4.2(e)
|
|
|
|
Form of First Supplemental Indenture to the Indenture between the Company and SunTrust Bank, as Trustee |
|
|
|
|
|
10.1(f)
|
|
|
|
Second Amendment, dated September 8, 2008, to the Amended and Restated Credit Agreement, dated April
28, 2006 |
|
|
|
|
|
10.2(g)
|
|
|
|
Amended and Restated Post Properties Inc. 2003 Incentive Stock Plan |
|
|
|
|
|
10.3(g)
|
|
|
|
Form of Amended and Restated Indemnification Agreement |
|
|
|
|
|
11.1(h)
|
|
|
|
Statement Regarding Computation of Per Share Earnings |
|
|
|
|
|
31.1
|
|
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended, and adopted under Section 302 of the Sarbanes-Oxley Act
of 2002 |
|
|
|
|
|
31.2
|
|
|
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934, as amended, and adopted under Section 302 of the Sarbanes-Oxley Act
of 2002 |
|
|
|
|
|
32.1
|
|
|
|
Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted under Section 906
of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
32.2
|
|
|
|
Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted under Section 906
of the Sarbanes-Oxley Act of 2002 |
|
|
|
(a) |
|
Filed as an exhibit to the Registration Statement on Form S-11 (SEC File No. 33-61936), as
amended, of the Company and incorporated herein by reference. |
|
(b) |
|
Filed as an exhibit to the Annual Report on Form 10-K of the Registrants for the year ended
December 31, 2002 and incorporated herein by reference. |
|
(c) |
|
Filed as an exhibit to the Quarterly Report on Form 10-Q of the Registrants for the quarter
ended September 30, 1999 and incorporated herein by reference. |
|
(d) |
|
Filed as an exhibit to the Current Report on Form 8-K of the Registrants filed March 20, 2008
and incorporated herein by reference. |
|
(e) |
|
Filed as an exhibit to the Registration Statement on Form S-3 (SEC File No. 333-42884), as
amended, of the Company and incorporated herein by reference. |
|
(f) |
|
Filed as an exhibit to the Current Report on Form 8-K of the Registrants filed September 11,
2008 and incorporated herein by reference. |
|
(g) |
|
Filed as an exhibit to the Current Report on Form 8-K of the Registrants filed October 22,
2008 and incorporated herein by reference. |
|
(h) |
|
The information required by this exhibit is included in note 5 to the consolidated financial
statements and incorporated herein by reference. |
-70-