XNYS:PPSPRA Post Properties Inc Pref Share Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file numbers 1-12080 and 0-28226

POST PROPERTIES, INC.

POST APARTMENT HOMES, L.P.

(Exact name of registrant as specified in its charter)

 

Georgia   58-1550675
Georgia   58-2053632
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

4401 Northside Parkway, Suite 800, Atlanta, Georgia 30327

(Address of principal executive offices -- zip code)

(404) 846-5000

(Registrant's 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.

 

Post Properties, Inc.      Yes         [X                     No         [   
Post Apartment Homes, L.P.      Yes         [X     No         [   

Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period as the registrant was required to submit and post such files).

 

Post Properties, Inc.      Yes         [X                     No         [   
Post Apartment Homes, L.P.      Yes         [X     No         [   

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.   Large Accelerated Filer  [X]   Accelerated Filer        [    ]  
  Non-Accelerated Filer    [   ]   (Do not check if a smaller reporting company)   Smaller Reporting Company  [    ]

Post Apartment Homes,

L.P.

 

Large Accelerated Filer  [   ]

Non-Accelerated Filer    [X]

 

Accelerated Filer        [    ]

(Do not check if a smaller reporting company)

  Smaller Reporting Company  [    ]

Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).

 

Post Properties, Inc.      Yes         [                        No         [X
Post Apartment Homes, L.P.      Yes         [        No         [X

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:

54,195,525 shares of common stock outstanding as of July 31, 2012.


Table of Contents

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended June 30, 2012, of Post Properties, Inc. and Post Apartment Homes, L.P. Unless stated otherwise or the context otherwise requires, references to “Post Properties” or the “Company” mean Post Properties, Inc. and its controlled and consolidated subsidiaries. References to “Post Apartment Homes” or the “Operating Partnership” mean Post Apartment Homes, L.P. and its controlled and consolidated subsidiaries. The terms “the Company,” “we,” “our” and “us” refer to the Company or the Company and the Operating Partnership collectively, as the text requires.

The Company is a real estate investment trust (“REIT”) and the general partner of the Operating Partnership. As of June 30, 2012, the Company owned an approximate 99.7% interest in the Operating Partnership. The remaining 0.3% interests are owned by persons other than the Company.

Management believes that combining the two quarterly reports on Form 10-Q for the Company and the Operating Partnership provides the following benefits:

 

   

Combined reports better reflect how management and the analyst community view the business as a single operating unit;

 

   

Combined reports enhance investors’ understanding of the Company and the Operating Partnership by enabling them to view the business and its results as a whole and in the same manner as management;

 

   

Combined reports are more efficiently prepared by the Company and the Operating Partnership and result in time and cost efficiencies; and

 

   

Combined reports are more efficiently reviewed by investors and analysts by reducing the amount of duplicate disclosures.

Management operates the Company and the Operating Partnership as one business. The management of the Company is comprised of the same members as the management of the Operating Partnership. These individuals are officers of the Company and employees of the Operating Partnership.

The Company believes it is important to understand the few differences between the Company and the Operating Partnership in the context of how these two entities operate as a consolidated company. The Company is a REIT, and its only material asset is its ownership of partnership interests of the Operating Partnership. As a result, the Company does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing public equity from time to time and guaranteeing certain debt of the Operating Partnership. The Operating Partnership holds all of the assets and indebtedness of the Company and retains the ownership interests in the Company’s joint ventures. Except for net proceeds from public equity issuances by the Company, which are contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates all remaining capital required by the Company’s business. These sources include the Operating Partnership’s operations and its direct or indirect incurrence of indebtedness.

There are a few differences in the disclosures for the Company and the Operating Partnership which are reflected and presented as such in the consolidated footnotes to the financial statements to this Form 10-Q. Noncontrolling interests and the presentation of equity are the main areas of difference between the consolidated financial statements of the Company and the Operating Partnership. The Company’s consolidated statement of operations reflects a reduction to income for the noncontrolling interests held by the Operating Partnership’s unitholders other than the Company (0.3% at June 30, 2012). This quarterly report on Form 10-Q presents the following separate financial information for both the Company and the Operating Partnership:

 

   

Consolidated financial statements;

 

   

The following information in the notes to the consolidated financial statements:

 

   

Computation of earnings (loss) per share for the Company

 

   

Computation of earnings (loss) per unit for the Operating Partnership


Table of Contents

POST PROPERTIES, INC.

POST APARTMENT HOMES, L.P.

INDEX

 

     Page  

Part I    FINANCIAL INFORMATION

  
   Item 1    Financial Statements   
   POST PROPERTIES, INC.   
  

Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

     1   
  

Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011

     2   
  

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011

     3   
  

Consolidated Statements of Equity and Accumulated Earnings for the six months ended June 30, 2012 and 2011

     4   
  

Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011

     5   
   POST APARTMENT HOMES, L.P.   
  

Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

     6   
  

Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011

     7   
  

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011

     8   
  

Consolidated Statements of Equity for the six months ended June 30, 2012 and 2011

     9   
  

Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011

     10   
   POST PROPERTIES, INC. & POST APARTMENT HOMES, L.P.   
  

Notes to Consolidated Financial Statements

     11   
   Item 2    Management’s Discussion and Analysis of Financial Condition and Results of Operations      28   
   Item 3    Quantitative and Qualitative Disclosures about Market Risk      48   
   Item 4    Controls and Procedures      48   

Part II OTHER INFORMATION

  
   Item 1    Legal Proceedings      49   
   Item 1A    Risk Factors      49   
   Item 2    Unregistered Sales of Equity Securities and Use of Proceeds      50   
   Item 3    Defaults Upon Senior Securities      50   
   Item 4    Mine Safety Disclosures      50   
   Item 5    Other Information      50   
   Item 6    Exhibits      51   
   Signatures      52   
   Exhibit Index      54   


Table of Contents

POST PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

     June 30,
2012
     December 31,
2011
 
     (Unaudited)         

Assets

     

Real estate assets

     

Land

     $ 302,392           $ 299,720     

Building and improvements

     2,138,643           2,085,929     

Furniture, fixtures and equipment

     259,542           251,663     

Construction in progress

     112,466           94,981     

Land held for future development

     51,088           55,396     
  

 

 

    

 

 

 
     2,864,131           2,787,689     

Less: accumulated depreciation

     (805,129)          (767,017)    

For-sale condominiums

     40,353           54,845     
  

 

 

    

 

 

 

Total real estate assets

     2,099,355           2,075,517     

Investments in and advances to unconsolidated real estate entities

     5,593           7,344     

Cash and cash equivalents

     51,628           13,084     

Restricted cash

     6,335           5,126     

Deferred financing costs, net

     9,982           6,381     

Other assets

     31,952           31,612     
  

 

 

    

 

 

 

Total assets

     $           2,204,845           $           2,139,064     
  

 

 

    

 

 

 

Liabilities and equity

     

Indebtedness

     $ 967,582           $ 970,443     

Accounts payable, accrued expenses and other

     90,105           72,102     

Investments in unconsolidated real estate entities

     16,125           15,945     

Dividends and distributions payable

     13,563           11,692     

Accrued interest payable

     5,289           5,185     

Security deposits and prepaid rents

     10,292           9,334     
  

 

 

    

 

 

 

Total liabilities

     1,102,956           1,084,701     
  

 

 

    

 

 

 

Redeemable common units

     7,016           6,840     
  

 

 

    

 

 

 

Commitments and contingencies

     

Equity

     

Company shareholders’ equity

     

Preferred stock, $.01 par value, 20,000 authorized:

     

8 1/2% Series A Cumulative Redeemable Shares, liquidation preference $50 per share, 868 shares issued and outstanding

     9           9     

Common stock, $.01 par value, 100,000 authorized:
54,109 and 53,002 shares issued and 54,109 and 52,988 shares
outstanding at June 30, 2012 and December 31, 2011, respectively

     541           530     

Additional paid-in-capital

     1,092,014           1,053,612     

Accumulated earnings

     15,349           -     

Accumulated other comprehensive income (loss)

     (9,879)          (2,633)    
  

 

 

    

 

 

 
     1,098,034           1,051,518     

Less common stock in treasury, at cost, 93 and 113 shares
at June 30, 2012 and December 31, 2011, respectively

     (3,089)          (4,000)    
  

 

 

    

 

 

 

Total Company shareholders’ equity

     1,094,945           1,047,518     

Noncontrolling interests – consolidated property partnerships

     (72)          5     
  

 

 

    

 

 

 

Total equity

     1,094,873           1,047,523     
  

 

 

    

 

 

 

Total liabilities and equity

     $ 2,204,845           $ 2,139,064     
  

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

1


Table of Contents

POST PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

    Three months ended
June 30,
    Six months ended
June 30,
 
    2012     2011     2012     2011  

Revenues

       

Rental

    $ 77,081          $ 70,499          $ 152,736          $ 139,592     

Other property revenues

    4,873          4,698          9,272          8,920     

Other

    206          227          428          443     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    82,160          75,424          162,436          148,955     
 

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

       

Property operating and maintenance (exclusive of items
shown separately below)

    35,231          33,206          69,868          65,823     

Depreciation

    19,497          18,808          38,838          37,560     

General and administrative

    3,883          4,246          8,168          8,362     

Investment and development

    322          296          802          774     

Other investment costs

    306          455          612          949     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    59,239          57,011         118,288          113,468     
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    22,921          18,413          44,148          35,487     

Interest income

    288          516          339          608     

Interest expense

    (11,103)         (14,437)         (22,748)         (28,912)    

Amortization of deferred financing costs

    (698)         (721)         (1,359)         (1,368)    

Net gains on condominium sales activities

    8,530          5,432          15,434          6,176     

Equity in income of unconsolidated real estate entities, net

    495          346          6,941          555     

Other income, net

    737          285          581          301     

Net loss on extinguishment of indebtedness

    -          -          (301)         -     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    21,170          9,834          43,035          12,847     

Noncontrolling interests - consolidated real estate entities

    (35)         (58)         (41)         (47)    

Noncontrolling interests - Operating Partnership

    (56)         (30)         (115)         (29)    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to the Company

    21,079          9,746          42,879          12,771     

Dividends to preferred shareholders

    (922)         (922)         (1,844)         (2,611)    

Preferred stock redemption costs

    -          -          -          (1,757)    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

    $ 20,157          $ 8,824          $ 41,035          $ 8,403     
 

 

 

   

 

 

   

 

 

   

 

 

 

Per common share data - Basic

       

Net income available to common shareholders

    $ 0.37          $ 0.18          $ 0.77          $ 0.17     
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding - basic

    53,773          49,875          53,430          49,460     
 

 

 

   

 

 

   

 

 

   

 

 

 

Per common share data - Diluted

       

Net income available to common shareholders

    $ 0.37          $ 0.17          $ 0.76          $ 0.17     
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding - diluted

    54,096          50,266          53,799          49,854     
 

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2


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POST PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

             Three months ended              Six months ended          
     June 30,      June 30,  
             2012                      2011                      2012                      2011          

Net income

     $ 21,170           $ 9,834           $ 43,035           $ 12,847     

Net change in derivative financial instruments

     (7,267)           -           (7,266)           -     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total comprehensive income

     13,903           9,834           35,769           12,847     

Comprehensive (income) loss attributable to noncontrolling interests:

           

Consolidated real estate entities

     (35)           (58)           (41)           (47)     

Operating Partnership

     (36)           (30)           (95)           (29)     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Company comprehensive income

     $ 13,832           $ 9,746           $ 35,633          $ 12,771     
  

 

 

    

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


Table of Contents

POST PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF EQUITY AND ACCUMULATED EARNINGS

(In thousands, except per share data)

(Unaudited)

 

     Preferred
Stock
     Common
Stock
     Additional
Paid-in Capital
     Accumulated
Earnings
     Accumulated
Other
Comprehensive
Income (Loss)
     Treasury
Stock
     Total
Company
Equity
     Noncontrolling
Interests -
Consolidated
Real Estate Entities
     Total Equity  

2012

                                                              

Equity & Accum. Earnings,
December 31, 2011

     $     9           $ 530           $     1,053,612           $ -           $     (2,633)          $     (4,000)          $     1,047,518           $     5           $ 1,047,523     

Comprehensive income (loss)

     -           -           -           42,879           (7,246)          -           35,633           41           35,674     

Sales of common stock, net

     -           4           18,621           -           -           -           18,625           -           18,625     

Employee stock purchase, stock option and other plan issuances

     -           7           18,302           -           -           758           19,067           -           19,067     

Conversion of redeemable common units for shares

     -           -           438           -           -           153           591           -           591     

Adjustment for ownership interest of redeemable common units

     -           -           (382)          -           -           -           (382)          -           (382)    

Stock-based compensation

     -           -           1,423           -           -           -           1,423           -           1,423     

Dividends to preferred shareholders

     -           -           -           (1,844)          -           -           (1,844)          -           (1,844)    

Dividends to common shareholders ($0.47 per share)

     -           -           -           (25,331)          -           -           (25,331)          -           (25,331)    

Distributions to noncontrolling interests – consolidated real estate entities

     -           -           -           -           -           -           -           (118)          (118)    

Adjustment to redemption value of redeemable common units

     -           -           -           (355)          -           -           (355)          -           (355)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity & Accum. Earnings,
June 30, 2012

     $     9           $ 541           $ 1,092,014           $ 15,349           $ (9,879)          $ (3,089)          $ 1,094,945           $ (72)          $ 1,094,873     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

2011

                                                              

Equity & Accum. Earnings,
December 31, 2010

     $     29           $ 489           $ 965,691           $ 4,577           $ -           $ (3,696)          $ 967,090           $ 205           $ 967,295     

Comprehensive income (loss)

     -           -           -           12,771           -           -           12,771           47           12,818     

Sales of common stock, net

     -           10           38,223           -           -           -           38,233           -           38,233     

Employee stock purchase, stock option and other plan issuances

     -           5           14,113           -           -           370           14,488           -           14,488     

Conversion of redeemable common units for shares

     -           -           321           -           -           -           321           -           321     

Adjustment for ownership interest of redeemable common units

     -           -           (225)          -           -           -           (225)          -           (225)    

Redemption of preferred stock

     (20)          -           (49,613)          -              -           (49,633)          -           (49,633)    

Stock-based compensation

     -           -           1,273           -           -           -           1,273           -           1,273     

Dividends to preferred shareholders

     -           -           -           (2,611)          -           -           (2,611)          -           (2,611)    

Dividends to common shareholders ($0.40 per share)

     -           -           (5,297)          (14,737)          -           -           (20,034)          -           (20,034)    

Distributions to noncontrolling interests – consolidated real estate entities

     -           -           -           -           -           -           -           (133)          (133)    

Adjustment to redemption value of redeemable common units

     -           -           (564)          -           -           -           (564)          -           (564)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity & Accum. Earnings,
June 30, 2011

     $     9           $ 504           $ 963,922           $ -           $ -           $ (3,326)          $ 961,109           $ 119           $ 961,228     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

4


Table of Contents

POST PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

             Six months ended         
June 30,
 
         2012              2011      

Cash Flows From Operating Activities

     

Net income

     $ 43,035           $ 12,847     

Adjustments to reconcile net income to net cash provided by operating activities:

     

Depreciation

     38,838           37,560     

Amortization of deferred financing costs

     1,359           1,368     

Gains on sales of real estate assets, net

     (15,434)           (6,176)     

Other, net

     691           665     

Equity in income of unconsolidated entities, net

     (6,941)           (555)     

Distributions of earnings of unconsolidated entities

     1,802           1,080     

Deferred compensation

     63           48     

Stock-based compensation

     1,427           1,278     

Net loss on extinguishment of indebtedness

     301           -     

Changes in assets, decrease in:

     

Other assets

     (1,774)           (450)     

Changes in liabilities, increase (decrease) in:

     

Accrued interest payable

     104           (50)     

Accounts payable and accrued expenses

     4,798           1,065     

Security deposits and prepaid rents

     (251)           (251)     
  

 

 

    

 

 

 

Net cash provided by operating activities

     68,018           48,429     
  

 

 

    

 

 

 

Cash Flows From Investing Activities

     

Construction and acquisition of real estate assets

         (64,959)               (36,965)     

Proceeds from sales of real estate assets

     39,981           32,765     

Capitalized interest

     (3,000)           (1,006)     

Property capital expenditures

     (12,313)           (10,812)     

Corporate additions and improvements

     (445)           (486)     

Distributions from unconsolidated entities

     7,016           -     

Note receivable collections and other investments

     760           434     
  

 

 

    

 

 

 

Net cash used in investing activities

     (32,960)           (16,070)     
  

 

 

    

 

 

 

Cash Flows From Financing Activities

     

Lines of credit proceeds

     94,899           24,523     

Lines of credit repayments

     (229,899)           (24,523)     

Proceeds from indebtedness

     230,000           -     

Payments on indebtedness

     (97,861)           (1,371)     

Payments of financing costs and other

     (5,152)           (3,972)     

Proceeds from sales of common stock

     18,625           38,233     

Proceeds from employee stock purchase and stock options plans

     18,365           13,785     

Redemption of preferred stock

     -           (49,633)     

Distributions to noncontrolling interests – real estate entities

     (118)           (133)     

Distributions to noncontrolling interests – common unitholders

     (67)           (68)     

Dividends paid to preferred shareholders

     (1,844)           (2,611)     

Dividends paid to common shareholders

     (23,462)           (19,723)     
  

 

 

    

 

 

 

Net cash provided by (used in) financing activities

     3,486           (25,493)     
  

 

 

    

 

 

 

Net increase in cash and cash equivalents

     38,544           6,866     

Cash and cash equivalents, beginning of period

     13,084           22,089     
  

 

 

    

 

 

 

Cash and cash equivalents, end of period

     $ 51,628           $ 28,955     
  

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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POST APARTMENT HOMES, L.P.

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

     June 30,
2012
    December 31,
2011
 
     (Unaudited)        

Assets

    

Real estate assets

    

Land

   $   302,392      $   299,720   

Building and improvements

     2,138,643        2,085,929   

Furniture, fixtures and equipment

     259,542        251,663   

Construction in progress

     112,466        94,981   

Land held for future development

     51,088        55,396   
  

 

 

   

 

 

 
     2,864,131        2,787,689   

Less: accumulated depreciation

     (805,129     (767,017

For-sale condominiums

     40,353        54,845   
  

 

 

   

 

 

 

Total real estate assets

     2,099,355        2,075,517   

Investments in and advances to unconsolidated real estate entities

     5,593        7,344   

Cash and cash equivalents

     51,628        13,084   

Restricted cash

     6,335        5,126   

Deferred financing costs, net

     9,982        6,381   

Other assets

     31,952        31,612   
  

 

 

   

 

 

 

Total assets

   $   2,204,845      $   2,139,064   
  

 

 

   

 

 

 

Liabilities and equity

    

Indebtedness

   $   967,582      $   970,443   

Accounts payable, accrued expenses and other

     90,105        72,102   

Investments in unconsolidated real estate entities

     16,125        15,945   

Distributions payable

     13,563        11,692   

Accrued interest payable

     5,289        5,185   

Security deposits and prepaid rents

     10,292        9,334   
  

 

 

   

 

 

 

Total liabilities

     1,102,956        1,084,701   
  

 

 

   

 

 

 

Redeemable common units

     7,016        6,840   
  

 

 

   

 

 

 

Commitments and contingencies

    

Equity

    

Operating Partnership equity

    

Preferred units

     43,392        43,392   

Common units

    

General partner

     12,210        11,662   

Limited partner

     1,049,222        995,097   

Accumulated other comprehensive income (loss)

     (9,879     (2,633
  

 

 

   

 

 

 

Total Operating Partnership equity

     1,094,945        1,047,518   

Noncontrolling interests – consolidated property partnerships

     (72     5   
  

 

 

   

 

 

 

Total equity

     1,094,873        1,047,523   
  

 

 

   

 

 

 

Total liabilities and equity

   $   2,204,845      $   2,139,064   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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POST APARTMENT HOMES, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per unit data)

(Unaudited)

 

             Three months ended                     Six months ended          
     June 30,     June 30,  
     2012     2011     2012     2011  

Revenues

        

Rental

   $ 77,081      $ 70,499      $ 152,736      $ 139,592   

Other property revenues

     4,873        4,698        9,272        8,920   

Other

     206        227        428        443   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     82,160        75,424        162,436        148,955   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

        

Property operating and maintenance (exclusive of itemsshown separately below)

     35,231        33,206        69,868        65,823   

Depreciation

     19,497        18,808        38,838        37,560   

General and administrative

     3,883        4,246        8,168        8,362   

Investment and development

     322        296        802        774   

Other investment costs

     306        455        612        949   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     59,239        57,011        118,288        113,468   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     22,921        18,413        44,148        35,487   

Interest income

     288        516        339        608   

Interest expense

     (11,103     (14,437     (22,748     (28,912

Amortization of deferred financing costs

     (698     (721     (1,359     (1,368

Net gains on condominium sales activities

     8,530        5,432        15,434        6,176   

Equity in income of unconsolidated real estate entities, net

     495        346        6,941        555   

Other income, net

     737        285        581        301   

Net loss on extinguishment of indebtedness

     -        -        (301     -   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     21,170        9,834        43,035        12,847   

Noncontrolling interests – consolidated real estate entities

     (35     (58     (41     (47
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to the Operating Partnership

     21,135        9,776        42,994        12,800   

Distributions to preferred unitholders

     (922     (922     (1,844     (2,611

Preferred unit redemption costs

     -        -        -        (1,757
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common unitholders

   $ 20,213      $ 8,854      $ 41,150      $ 8,432   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per common unit data – Basic

        

Net income available to common unitholders

   $ 0.37      $ 0.18      $ 0.77      $ 0.17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common units outstanding – basic

     53,923        50,044        53,581        49,630   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per common unit data – Diluted

        

Net income available to common unitholders

   $ 0.37      $ 0.17      $ 0.76      $ 0.17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common units outstanding – diluted

       54,246          50,435          53,950          50,024   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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POST APARTMENT HOMES, L.P.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

     Three months ended   Six months ended
     June 30,   June 30,
             2012                   2011                   2012                   2011        

Net income

     $ 21,170       $ 9,834       $ 43,035       $ 12,847  

Net change in derivative financial instruments

       (7,267 )       —           (7,266 )       —    
    

 

 

     

 

 

     

 

 

     

 

 

 

Total comprehensive income

       13,903         9,834         35,769         12,847  

Comprehensive (income) loss attributable to noncontrolling interests:

                

Consolidated real estate entities

       (35 )       (58 )       (41 )       (47 )
    

 

 

     

 

 

     

 

 

     

 

 

 

Total Operating Partnership comprehensive income

     $ 13,868       $ 9,776       $ 35,728       $ 12,800  
    

 

 

     

 

 

     

 

 

     

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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POST APARTMENT HOMES, L.P.

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands, except per unit data)

(Unaudited)

 

             Accumulated   Total   Noncontrolling    
         Common Units   Other   Operating   Interests -    
       Preferred  
Units
    General  
Partner
  Limited
  Partners  
  Comprehensive
Income (Loss)
  Partnership
Equity
  Consolidated
Real Estate Entities    
  Total
Equity    
2012                             

Equity, December 31, 2011

     $ 43,392       $ 11,662       $ 995,097       $ (2,633 )     $ 1,047,518       $ 5       $ 1,047,523  

Comprehensive income (loss)

       1,844         411         40,624         (7,246 )       35,633             41         35,674  

Contributions from the Company related to sales of Company common stock

               186         18,439                 18,625                 18,625  

Contributions from the Company related to employee stock purchase, stock option and other plans

               191         18,876                 19,067                 19,067  

Conversion of redeemable common units

                       591                 591                 591  

Adjustment for ownership interest of redeemable common units

                       (382 )               (382 )               (382 )

Equity-based compensation

               14         1,409                 1,423                 1,423  

Distributions to preferred unitholders

       (1,844 )                               (1,844 )               (1,844 )

Distributions to common unitholders ($0.47 per unit)

               (254 )       (25,077 )               (25,331 )               (25,331 )

Distributions to noncontrolling interests - consolidated real estate entities

                                               (118 )       (118 )

Adjustment to redemption value of redeemable common units

                       (355 )               (355 )               (355 )
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Equity, June 30, 2012

     $ 43,392       $ 12,210       $ 1,049,222       $ (9,879 )     $ 1,094,945       $ (72 )     $ 1,094,873  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

2011

                            

Equity, December 31, 2010

     $ 92,963       $ 10,354       $ 863,773       $       $ 967,090       $ 205       $ 967,295  

Comprehensive income (loss)

       2,611         102         10,058                 12,771         47         12,818  

Contributions from the Company related to sales of Company common stock

               382         37,851                 38,233                 38,233  

Contributions from the Company related to employee stock purchase, stock option and other plans

               145         14,343                 14,488                 14,488  

Conversion of redeemable common units

                       321                 321                 321  

Adjustment for ownership interest of redeemable common units

                       (225 )               (225 )               (225 )

Redemption of preferred units

       (49,571 )               (62 )           (49,633 )               (49,633 )

Equity-based compensation

               13         1,260                 1,273                 1,273  

Distributions to preferred unitholders

       (2,611 )                               (2,611 )               (2,611 )

Distributions to common unitholders ($0.40 per unit)

               (201 )       (19,833 )               (20,034 )               (20,034 )

Distributions to noncontrolling interests - consolidated real estate entities

                                               (133 )       (133 )

Adjustment to redemption value of redeemable common units

                       (564 )               (564 )               (564 )
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Equity, June 30, 2011

     $ 43,392       $ 10,795       $ 906,922       $       $ 961,109       $     119       $ 961,228  
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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POST APARTMENT HOMES, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six months ended
     June 30,
             2012                   2011        

Cash Flows From Operating Activities

        

Net income

     $ 43,035       $ 12,847  

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation

       38,838         37,560  

Amortization of deferred financing costs

       1,359         1,368  

Gains on sales of real estate assets, net

       (15,434 )       (6,176 )

Other, net

       691         665  

Equity in income of unconsolidated entities, net

       (6,941 )       (555 )

Distributions of earnings of unconsolidated entities

       1,802         1,080  

Deferred compensation

       63         48  

Equity-based compensation

       1,427         1,278  

Net loss on extinguishment of indebtedness

       301         –    

Changes in assets, decrease in:

        

Other assets

       (1,774 )       (450 )

Changes in liabilities, increase (decrease) in:

        

Accrued interest payable

       104         (50 )

Accounts payable and accrued expenses

       4,798         1,065  

Security deposits and prepaid rents

       (251 )       (251 )
    

 

 

     

 

 

 

Net cash provided by operating activities

       68,018         48,429  
    

 

 

     

 

 

 

Cash Flows From Investing Activities

        

Construction and acquisition of real estate assets

       (64,959 )       (36,965 )

Proceeds from sales of real estate assets

       39,981         32,765  

Capitalized interest

       (3,000 )       (1,006 )

Property capital expenditures

       (12,313 )       (10,812 )

Corporate additions and improvements

       (445 )       (486 )

Distributions from unconsolidated entities

       7,016         –    

Note receivable collections and other investments

       760         434  
    

 

 

     

 

 

 

Net cash used in investing activities

       (32,960 )       (16,070 )
    

 

 

     

 

 

 

Cash Flows From Financing Activities

        

Lines of credit proceeds

       94,899         24,523  

Lines of credit repayments

       (229,899 )       (24,523 )

Proceeds from indebtedness

       230,000         –    

Payments on indebtedness

       (97,861 )       (1,371 )

Payments of financing costs and other

       (5,152 )       (3,972 )

Contributions from the Company related to stock sales, employee stock purchase and stock option plans

       36,990         52,018  

Redemption of preferred units

       –           (49,633 )

Distributions to noncontrolling interests – real estate entities

       (118 )       (133 )

Distributions to noncontrolling interests – non-Company common unitholders

       (67 )       (68 )

Distributions to preferred unitholders

       (1,844 )       (2,611 )

Distributions to common unitholders

       (23,462 )       (19,723 )
    

 

 

     

 

 

 

Net cash provided by (used in) financing activities

       3,486         (25,493 )
    

 

 

     

 

 

 

Net increase in cash and cash equivalents

       38,544         6,866  

Cash and cash equivalents, beginning of period

       13,084         22,089  
    

 

 

     

 

 

 

Cash and cash equivalents, end of period

     $ 51,628       $ 28,955  
    

 

 

     

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

POST PROPERTIES, INC. AND 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 Properties, Inc. (the “Company”) and its subsidiaries develop, own and manage upscale multi-family apartment communities in selected markets in the United States. The Company through its wholly-owned subsidiaries is the sole general partner, a limited partner and owns a majority interest in Post Apartment Homes, L.P. (the “Operating Partnership”), a Georgia limited partnership. The Operating Partnership, through its operating divisions and subsidiaries conducts substantially all of the on-going operations of the Company, a publicly traded corporation which operates as a self-administered and self-managed real estate investment trust (“REIT”). As used herein, the term “Company” includes Post Properties, Inc. and its subsidiaries, including Post Apartment Homes, L.P., unless the context indicates otherwise.

The Company has elected to qualify and operate as a self-administrated and self-managed 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. The Operating Partnership is governed under the provisions of a limited partnership agreement, as amended. 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 Internal Revue Code of 1986, as amended.

At June 30, 2012, the Company had interests in 21,622 apartment units in 58 communities, including 1,471 apartment units in four communities held in unconsolidated entities and 1,810 apartment units at six communities currently under development or in lease-up. The Company is also selling luxury for-sale condominium homes in two communities through a taxable REIT subsidiary. At June 30, 2012, approximately 33.4%, 23.8%, 13.0% and 10.7% (on a unit basis) of the Company’s operating communities were located in the Atlanta, Georgia, Dallas, Texas, the greater Washington, D.C. and Tampa, Florida metropolitan areas, respectively.

At June 30, 2012, the Company had outstanding 54,109 shares of common stock and owned the same number of units of common limited partnership interests (“Common Units”) in the Operating Partnership, representing a 99.7% ownership interest in the Operating Partnership. Common Units held by persons other than the Company totaled 143 at June 30, 2012 and represented a 0.3% 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, but outside the control, 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 Company’s 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. The Company’s weighted average common ownership interest in the Operating Partnership was 99.7% for the three and six months ended June 30, 2012 and 2011.

Basis of presentation

The accompanying unaudited financial statements have been prepared by the Company’s 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 six months ended June 30, 2012 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 Company’s audited financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2011.

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 ASC Topic 810, “Consolidation.” Under ASC Topic 810, 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 ASC Topic 810 requires management to make significant estimates and

 

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POST PROPERTIES, INC. AND POST APARTMENT HOMES, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share or unit and apartment unit data)

 

 

judgments about the Company’s and its other partners’ rights, obligations and economic interests in such entities. For entities in which the Company has less than a controlling financial interest or entities where it is not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting. Accordingly, the Company’s 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 noncontrolling interest of common unitholders (also referred to as “Redeemable Common Units”) 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 Company’s 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 ASC Topic 360-20, “Property, Plant and Equipment – Real Estate Sales.” The Company accounts for each condominium project under either the “Deposit Method” or the “Percentage of Completion Method,” based on a specific evaluation of the factors specified in ASC Topic 360-20. 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, whether sufficient units have been contracted to ensure the project will not revert to a rental project, the ability to reasonably estimate the aggregate project sale proceeds and aggregate project costs and the determination that the buyer has made an adequate initial and continuing cash investment under the contract in accordance with ASC Topic 360-20. As of June 30, 2012, all condominium communities are accounted for under the Deposit Method. Under ASC Topic 360-20, the Company uses the relative sales value method to allocate costs and recognize profits from condominium sales. Under the relative sales value method, estimates of aggregate project revenues and aggregate project costs are used to determine the allocation of project cost of sales and the resulting profit in each accounting period. In subsequent periods, cumulative project cost of sale allocations and the resulting profits are adjusted to reflect changes in the actual and estimated costs and revenues of each project.

Cost capitalization

For communities under development or rehabilitation, the Company capitalizes interest, real estate taxes, and certain internal personnel and associated costs associated with the development and construction activity. Interest is capitalized to projects under development or construction based upon the weighted average cumulative project costs for each month multiplied by the Company’s weighted average borrowing costs, expressed as a percentage. Weighted average borrowing costs include the costs of the Company’s fixed rate secured and unsecured borrowings and the variable rate unsecured borrowings under its line of credit facilities. The weighted average borrowing costs, expressed as a percentage, were 5.6% and 6.0% for the six months ended June 30, 2012 and 2011, respectively. Internal development and construction personnel and associated costs are capitalized to projects under development or construction based upon the effort associated with such projects. Aggregate internal development and construction personnel and associated costs capitalized to projects under development or construction were $913 and $627 for the three months and $1,719 and $1,096 for the six months ended June 30, 2012 and 2011, respectively. The Company treats each unit in an apartment community separately for cost accumulation, capitalization and expense recognition purposes. Prior to the completion of rental and condominium units, interest and other construction costs are capitalized and 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 or sale. This results in a proration of costs between amounts that are capitalized and expensed as the residential units in apartment and condominium development communities become available for occupancy or sale. In addition, prior to the completion of rental units, the Company expenses as incurred substantially all operating expenses (including pre-opening marketing as well as property management and leasing personnel expenses) of such rental communities. Prior to the completion and closing of condominium units, the Company expenses all sales and marketing costs related to such units.

 

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POST PROPERTIES, INC. AND POST APARTMENT HOMES, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share or unit and apartment unit data)

 

 

Real estate assets, depreciation and impairment

Real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. Major replacements and betterments are capitalized and depreciated over their estimated useful lives. Depreciation is computed on a straight-line basis over the useful lives of the properties (buildings and components, – 40 years; other building and land improvements – 20 years; furniture, fixtures and equipment – 5-10 years).

The Company continually evaluates the recoverability of the carrying value of its real estate assets using the methodology prescribed in ASC Topic 360, “Property, Plant and Equipment.” Factors considered by management in evaluating impairment of its existing real estate assets held for investment include significant declines in property operating profits, annually recurring property operating losses and other significant adverse changes in general market conditions that are considered permanent in nature. Under ASC Topic 360, a real estate asset held for investment is not considered impaired if the undiscounted, estimated future cash flows of an asset (both the annual estimated cash flow from future operations and the estimated cash flow from the theoretical sale of the asset) over its estimated holding period are in excess of the asset’s net book value at the balance sheet date. If any real estate asset held for investment is considered impaired, a loss is provided to reduce the carrying value of the asset to its estimated fair value. In addition, for-sale condominium units completed and ready for their intended use are evaluated for impairment using the methodology for assets held for sale (using discounted projected future cash flows).

The Company periodically classifies real estate assets as held for sale. An asset is classified as held for sale after the approval of the Company’s board of directors and after an active program to sell the asset has commenced. Upon the classification of a real estate asset as held for sale, the carrying value of the asset is reduced to the lower of its net book value or its estimated fair value, less costs to sell the asset. Subsequent to the classification of assets as held for sale, no further depreciation expense is recorded. Real estate assets held for sale are stated separately on the accompanying consolidated balance sheets. Upon a decision to no longer market an asset for sale, the asset is classified as an operating asset and depreciation expense is reinstated. As of June 30, 2012, there were no apartment communities held for sale.

For condominium communities, the operating results and associated gains and losses are reflected in continuing operations (see discussion under “revenue recognition” above), and the net book value of the condominium assets is reflected separately on the consolidated balance sheet in the caption titled, “For-sale condominiums.”

Derivative financial instruments

The Company accounts for derivative financial instruments at fair value under the provisions of ASC Topic 815, “Derivatives and Hedging.” In conjunction with its implementation of updates to the fair value measurements guidance, the Company made an accounting policy election as of January 1, 2012 to measure derivative financial instruments subject to master netting agreements on a net basis. The Company uses derivative financial instruments, primarily interest rate swap arrangements to manage or hedge its exposure to interest rates changes. Under ASC Topic 815, derivative instruments qualifying as hedges of specific cash flows are recorded on the balance sheet at fair value with an offsetting increase or decrease to accumulated other comprehensive income, an equity account, until the hedged transactions are recognized in earnings. Quarterly, the Company evaluates the effectiveness of its cash flow hedges. Any ineffective portion of cash flow hedges are recognized immediately in earnings.

Fair value measurements

The Company applies the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures,” to the valuation of real estate assets recorded at fair value, if any, to its impairment valuation analysis of real estate assets, to its disclosure of the fair value of financial instruments, principally indebtedness and to its derivative financial instruments. Fair value disclosures required under ASC Topic 820 are summarized in note 8 utilizing 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.

 

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POST PROPERTIES, INC. AND 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 ASC guidance

The Company adopted new guidance in ASC Topic 220, “Comprehensive Income,” related to the presentation of comprehensive income as of December 31, 2011. The new guidance requires the presentation of the components of comprehensive income in one continuous statement or in two separate but consecutive statements. The Company has presented a separate statement of comprehensive income in its consolidated financial statements for all periods presented. The adoption of this guidance did not have a material effect on the Company’s results of operations or financial condition.

Supplemental cash flow information

Supplemental cash flow information for the six months ended June 30, 2012 and 2011 is as follows:

 

     Six months ended
     June 30,
             2012                    2011        

Interest paid, including interest capitalized

     $     25,644        $     29,968  

Income tax payments (refunds), net

       70          705  

Non-cash investing and financing activities:

         

Dividends and distributions payable

       13,563          10,124  

Conversions of redeemable common units

       591          321  

Common stock 401k matching contribution

       639          655  

Construction cost accruals, increase (decrease)

       6,440          (3,332 )

Adjustments to equity related to redeemable common units, net

       (737 )        (789 )

 

2.

REAL ESTATE ACTIVITY

Acquisitions / Dispositions

The Company did not acquire any apartment communities during the six months ended June 30, 2012 or 2011. Other than the sale of an apartment community held by an unconsolidated entity during the first quarter of 2012 (see note 3), there were no other sales of apartment communities or land parcels during the six months ended June 30, 2012 and 2011. At June 30, 2012, the Company did not have any apartment communities or land parcels classified as held for sale.

In July 2012, the Company acquired a 360-unit apartment community, including approximately 7,612 square feet of retail space, located in Charlotte, North Carolina for a purchase price of $74,000.

Condominium activities

At June 30, 2012, the Company was selling condominium homes in two wholly owned condominium communities. The Company’s condominium community in Austin, Texas (the “Austin Condominium Project”), originally consisting of 148 condominium units, had an aggregate carrying value of $29,956 at June 30, 2012. The Austin Condominium Project commenced closings of condominium units in the second quarter of 2010. The Company’s condominium community in Atlanta, Georgia (the “Atlanta Condominium Project”), originally consisting of 129 condominium units, had an aggregate carrying value of $13,397 at June 30, 2012. The Atlanta Condominium Project commenced closings of condominium units in the fourth quarter of 2010. These amounts were included in the accompanying balance sheet under the caption, “For-sale condominiums.”

The revenues, costs and expenses associated with consolidated condominium activities for the three and six months ended June 30, 2012 and 2011 were as follows:

 

     Three months ended
June 30,
   Six months ended June 30,
               2012                         2011                         2012                         2011           

Condominium revenues

     $ 22,945        $ 19,090        $ 40,526        $ 32,765  

Condominium costs and expenses

       (14,415 )        (13,658 )        (25,704 )        (26,589 )
    

 

 

      

 

 

      

 

 

      

 

 

 

Gains on sales of condominiums, before income taxes

       8,530          5,432          14,822          6,176  

Income tax benefit

       -          -          612          -  
    

 

 

      

 

 

      

 

 

      

 

 

 

Net gains on sales of condominiums

     $ 8,530        $ 5,432        $ 15,434        $ 6,176  
    

 

 

      

 

 

      

 

 

      

 

 

 

 

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POST PROPERTIES, INC. AND POST APARTMENT HOMES, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share or unit and apartment unit data)

 

 

The Company closed 26 and 18 condominium homes for the three months and 45 and 30 condominium home for the six months ended June 30, 2012 and 2011, respectively, at these condominium communities. For the six months ended June 30, 2012, the Company recognized an income tax benefit of $612 related to the recovery of income taxes paid in prior years by the Company’s taxable REIT subsidiaries (see note 12).

 

3.

INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ENTITIES

At June 30, 2012, the Company held investments in various individual limited liability companies (the “Apartment LLCs”) with institutional investors that own four apartment communities, including three communities located in Atlanta, Georgia and one community located in Washington, D.C. The Company has a 25% to 35% equity interest in these Apartment LLCs.

The Company accounts for its investments in the Apartment LLCs using the equity method of accounting. At June 30, 2012 and December 31, 2011, the Company’s investment in the 35% owned Apartment LLCs totaled $5,593 and $7,344, respectively, excluding the credit investments discussed below. The excess of the Company’s investment over its equity in the underlying net assets of the Apartment LLC holding the Washington, D.C. community was approximately $2,876 at June 30, 2012. The excess investment related to this Apartment LLC is being amortized as a reduction to earnings on a straight-line basis over the lives of the related assets. The Company’s investment in the 25% owned Apartment LLCs at June 30, 2012 and December 31, 2011 reflects a credit investment of $16,125 and $15,945, respectively. These credit balances resulted from distribution of financing proceeds in excess of the Company’s historical cost upon the formation of the Apartment LLCs and are reflected in consolidated liabilities on the Company’s consolidated balance sheet. The operating results of the Company include its allocable share of net income from the investments in the Apartment LLCs. The Company provides property and asset management services to the Apartment LLCs for which it earns fees.

A summary of financial information for the Apartment LLCs in the aggregate is as follows:

 

Apartment LLCs - Balance Sheet Data

           June 30,        
2012
          December 31,         
2011

Real estate assets, net of accumulated depreciation of $35,290 and $32,780 at June 30, 2012 and December 31, 2011, respectively

     $ 215,421       $ 217,443  

Assets held for sale, net

       -         28,846  

Cash and other

       7,117         6,526  
    

 

 

     

 

 

 

Total assets

     $     222,538       $     252,815  
    

 

 

     

 

 

 

Mortgage notes payable

     $ 177,723       $ 206,495  

Other liabilities

       3,299         2,737  
    

 

 

     

 

 

 

Total liabilities

       181,022         209,232  

Members’ equity

       41,516         43,583  
    

 

 

     

 

 

 

Total liabilities and members’ equity

     $ 222,538       $ 252,815  
    

 

 

     

 

 

 

Company’s equity investment in Apartment LLCs (1)

     $ (10,532 )     $ (8,601 )
    

 

 

     

 

 

 

 

(1)

At June 30, 2012 and December 31, 2011, the Company’s equity investment includes its credit investments of $16,125 and $15,945, respectively, discussed above.

 

 

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POST PROPERTIES, INC. AND POST APARTMENT HOMES, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share or unit and apartment unit data)

 

 

     Three months ended      Six months ended  
     June 30,      June 30,  

Apartment LLCs - Income Statement Data

           2012                      2011                      2012                      2011      

Revenues

           

Rental

   $     6,152       $     5,842       $     12,194       $     11,611   

Other property revenues

     501         483         937         909   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     6,653         6,325         13,131         12,520   
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses

           

Property operating and maintenance

     2,555         2,331         5,082         4,794   

Depreciation and amortization

     1,428         1,480         3,033         2,954   

Interest

     2,258         2,555         4,625         5,081   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     6,241         6,366         12,740         12,829   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss from continuing operations

     412         (41      391         (309

Gain (loss) from discontinued operations

     -         (42      21,607         (99
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ 412       $ (83    $ 21,998       $ (408
  

 

 

    

 

 

    

 

 

    

 

 

 

Company’s share of net income in Apartment LLCs

   $ 495       $ 346       $ 6,941       $ 555   
  

 

 

    

 

 

    

 

 

    

 

 

 

In February 2012, one of the 35% owned Apartment LLCs sold an apartment community located in Atlanta, Georgia. The net cash proceeds from the sale of approximately $50,500 were used to retire the Apartment LLCs outstanding mortgage note payable of $29,272 and to make distributions to its members. The results of operations and the gain on sale of the apartment community from this Apartment LLC are included in discontinued operations for all periods presented in the financial data listed above. The Company’s equity in income of unconsolidated entities for the six months ended June 30, 2012 includes a net gain of approximately $6,055 resulting from this transaction.

At June 30, 2012, mortgage notes payable included four mortgage notes. The first $51,000 mortgage note bears interest at 3.50%, requires monthly interest only payments and matures in 2019. The second and third mortgage notes total $85,724, bear interest at 5.63%, require interest only payments and mature in 2017. The fourth mortgage note totals $41,000, bears interest at 5.71%, requires interest only payments, and matures in January 2018 with a one-year automatic extension at a variable interest rate.

 

4.

INDEBTEDNESS

At June 30, 2012 and December 31, 2011, the Company’s indebtedness consists of the following:

 

Description

  

Payment
Terms

  

Interest Rate

  

Maturity Date

            June 30,    
2012
       December 31,    
2011

Senior Unsecured Notes

   Int.    4.75% - 6.30%    2013-2017    (1)      $ 280,091        $ 375,775  

Unsecured Bank Term Loan

   Int.    LIBOR + 1.90%  (2)    2018           230,000           

Unsecured Revolving Lines of Credit

   Int.    LIBOR + 1.40%  (3)    2016                    135,000  

Secured Mortgage Notes

   Prin. and Int.    4.88% - 5.99%    2013-2019    (4)        457,491          459,668  
                

 

 

      

 

 

 

Total

                 $ 967,582        $ 970,443  
                

 

 

      

 

 

 

 

(1)

There are no remaining maturities of senior unsecured notes in 2012. Senior unsecured notes totaling approximately $130,091 mature in June 2013. The remaining unsecured notes mature in 2017.

(2)

Represents stated rate. As discussed below, the Company has entered into interest rate swap arrangements that effectively fix the interest rate under this facility at 3.45% as of June 30, 2012.

(3)

Represents stated rate.

(4)

There are no maturities of secured notes in 2012. These notes mature between 2013 and 2019.

 

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POST PROPERTIES, INC. AND POST APARTMENT HOMES, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share or unit and apartment unit data)

 

 

Debt maturities

The aggregate maturities of the Company’s indebtedness are as follows:

 

Remainder of 2012

     $ 2,242        

2013

     186,606        

2014

     3,961        

2015

     124,205        

2016

     4,419           (1

Thereafter

     646,149        
  

 

 

    
     $     967,582        
  

 

 

    

 

(1)

Includes outstanding balances on lines of credit totaling $0.

Debt issuances and retirements

In June 2012, the Company repaid $95,684 of senior unsecured notes upon their maturity. The stated interest rate on these notes was 5.45%.

In January 2012, the Company entered into a $300,000 unsecured bank term loan facility provided by a syndicate of eight financial institutions (the “Term Loan”). In conjunction with the closing of the Term Loan, the Company borrowed $100,000, which was used to pay down outstanding line of credit borrowings. On May 31, 2012, the Company borrowed an additional $130,000, which was primarily used to retire the senior unsecured notes discussed above. On July 2, 2012, the Company borrowed the remaining available capacity of $70,000 under the Term Loan, which will be used for general corporate purposes, including the repayment of debt. The Term Loan initially bears interest at LIBOR plus 1.90% and required the payment of unused commitment fees of 0.25% on the aggregate undrawn loan commitments through July 2, 2012. The Term Loan provides for the stated interest rate to be adjusted up or down based on changes in the credit ratings on the Company’s senior unsecured debt. The component of the interest rate based on the Company’s credit ratings ranges from 1.50% to 2.30%. The Term Loan matures in January 2018, includes two six-month extension options, and carries other terms, including financial covenants, substantially consistent with the Syndicated Line discussed further below. As discussed in note 8, the Company entered into interest rate swap arrangements to serve as cash flow hedges of amounts expected to be outstanding under the Term Loan. The interest rate swap arrangements effectively fix the LIBOR component of the interest rate paid under the Term Loan at a blended rate of approximately 1.54%, when fully drawn. As such, the Term Loan is initially expected to bear interest at an effective blended fixed rate of approximately 3.44%, when fully drawn (subject to any adjustment based on subsequent changes in the Company’s credit ratings).

Unsecured lines of credit

At June 30, 2012, the Company had a $300,000 syndicated unsecured revolving line of credit, which was amended in January 2012 (the “Syndicated Line”). The Syndicated Line has a current stated interest rate of LIBOR plus 1.40% (previously LIBOR plus 2.30%) and is provided by a syndicate of eleven financial institutions. The Syndicated Line currently requires the payment of annual facility fees of 0.30% (previously 0.45%) of the aggregate loan commitments. The Syndicated Line matures in January 2016 and may be extended for an additional year at the Company’s option, subject to the satisfaction of certain conditions. 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 Company’s senior unsecured debt. The component of the interest rate and the facility fee rate that are based on the Company’s credit ratings range from 1.00% to 1.80% and from 0.15% to 0.40%, respectively. The Syndicated Line also includes a competitive bid option for borrowings up to 50% of the loan commitments, which may result in interest rates for such borrowings below the stated interest rates for the Syndicated Line, depending on market conditions. The credit agreement for the Syndicated Line contains customary restrictions, representations, covenants and events of default, including minimum fixed charge coverage, minimum unsecured interest 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. The Syndicated Line prohibits the Company from investing further capital in condominium assets, excluding its current investments in the Atlanta Condominium Project and the Austin Condominium Project, and certain mixed-use projects, as defined. At June 30, 2012, letters of credit to third parties totaling $575 had been issued for the account of the Company under this facility.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share or unit and apartment unit data)

 

 

Additionally, at June 30, 2012, the Company had a $30,000 unsecured line of credit, which was also amended in January 2012 (the “Cash Management Line”). The Cash Management Line matures in January 2016, includes a one-year extension option, and carries pricing and terms, including financial covenants, substantially consistent with the Syndicated Line.

In connection with the Term Loan financing and the refinancing of the Syndicated Line and the Cash Management Line in January 2012, the Company incurred fees and expenses of approximately $5,152. In connection with the refinancing of the line of credit facilities, the Company recognized an extinguishment loss of $301 for the six months ended June 30, 2012 related to the write-off of a portion of unamortized deferred financing costs associated with the amendment of the Syndicated Line.

Debt compliance and other

The Company’s Syndicated Line, Cash Management Line, Term Loan and senior unsecured notes contain customary restrictions, representations, covenants and events of default and require the Company to meet certain financial covenants. Debt service and fixed charge coverage covenants require the Company to maintain coverages of a minimum of 1.5 to 1.0, as defined in applicable debt arrangements. Additionally, the Company’s ratio of unencumbered adjusted property-level net operating income to unsecured interest expense may not be less than 2.0 to 1.0, as defined in the applicable debt arrangements. Leverage covenants generally require the Company to maintain calculated covenants above/below minimum/maximum thresholds. The primary leverage ratios under these arrangements include total debt to total asset value (maximum of 60%), total secured debt to total asset value (maximum of 40%) and unencumbered assets to unsecured debt (minimum of 1.5 to 1.0), as defined in the applicable debt arrangements. The Company believes it met these financial covenants at June 30, 2012.

 

5.

EQUITY AND NONCONTROLLING INTERESTS

Common stock

In May 2012, the Company adopted a new at-the-market (“ATM”) common equity sales program for the sale of up to 4,000 shares of common stock. At June 30, 2012, the Company has approximately 4,137 shares remaining for issuance under its new and previous ATM programs. Sales of common stock under the ATM programs totaled 97 and 578 shares for gross proceeds of $4,847 and $23,220 for the three months and 414 and 999 shares for gross proceeds of $19,159 and $39,054 for the six months ended June 30, 2012 and 2011, respectively. The average gross sales prices per share were $50.23 and $40.19 for the three months and $46.33 and $39.11 for the six months ended June 30, 2012 and 2011, respectively. The Company’s net proceeds totaling $4,643 and $22,733 for the three months ended and $18,625 and $38,233 for the six months ended June 30, 2012 and 2011, respectively, were contributed to the Operating Partnership in exchange for a like number of common units. The Company and the Operating Partnership have and expect to use the proceeds from this program for general corporate purposes.

In December 2010, the Company’s board of directors adopted a stock and unsecured note repurchase program under which the Company and the Operating Partnership may repurchase up to $200,000 of common and preferred stock and unsecured notes through December 2012. The Company repurchased its 7 5/8% Series B preferred stock at its redemption value of $49,571 during the first quarter of 2011 under this program.

Noncontrolling interests

In accordance with ASC Topic 810, the Company and the Operating Partnership determined that the noncontrolling interests related to the common units of the Operating Partnership, held by persons other than the Company, met the criterion to be classified and accounted for as “temporary” equity (reflected outside of total equity as “Redeemable Common Units”). At June 30, 2012, the aggregate redemption value of the noncontrolling interests in the Operating Partnership of $7,016 was in excess of its net book value of $2,755. At December 31, 2011, the aggregate redemption value of the noncontrolling interests in the Operating Partnership of $6,840 was in excess of its net book value of $2,935. The Company further determined that the noncontrolling interests in its consolidated real estate entities met the criterion to be classified and accounted for as a component of permanent equity.

 

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POST PROPERTIES, INC. AND POST APARTMENT HOMES, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share or unit and apartment unit data)

 

 

A roll-forward of activity relating to the Company’s Redeemable Common Units for the six months ended June 30, 2012 and 2011 was as follows:

 

     Six months ended June 30,
             2012                   2011        

Redeemable common units, beginning of period

       $     6,840         $     6,192  

Comprehensive income (loss)

       95         29  

Conversion of redeemable common units for shares

       (591       (321

Adjustment for ownership interest of redeemable common units

       382         225  

Stock-based compensation

       4         5  

Distributions to common unitholders

       (69       (67

Adjustment to redemption value of redeemable common units

       355         564  
    

 

 

     

 

 

 

Redeemable common units, end of period

       $     7,016         $     6,627  
    

 

 

     

 

 

 

 

6.

COMPANY EARNINGS PER SHARE

For the three and six months ended June 30, 2012 and 2011, a reconciliation of the numerator and denominator used in the computation of basic and diluted net income per share was as follows:

 

     Three months ended
June 30,
   Six months ended
June 30,
             2012                    2011                    2012                    2011        

Net income attributable to
common shareholders (numerator):

   

              

Net income

     $ 21,170          9,834        $ 43,035        $ 12,847  

Noncontrolling interests - consolidated real estate entities

       (35 )        (58 )        (41 )        (47 )

Noncontrolling interests - Operating Partnership

       (56 )        (30 )        (115 )        (29 )

Preferred stock dividends

       (922 )        (922 )        (1,844 )        (2,611 )

Preferred stock redemption costs

       —            —            —            (1,757 )

Unvested restricted stock (allocation of earnings)

       (48 )        (29 )        (94 )        (26 )
    

 

 

      

 

 

      

 

 

      

 

 

 

Net income (loss) available to common shareholders

     $ 20,109        $ 8,795        $ 40,941        $ 8,377  
    

 

 

      

 

 

      

 

 

      

 

 

 

Common shares (denominator):

                   

Weighted average shares outstanding - basic

       53,773          49,875          53,430          49,460  

Dilutive shares from stock options

       323          391          369          394  
    

 

 

      

 

 

      

 

 

      

 

 

 

Weighted average shares outstanding - diluted

       54,096          50,266          53,799          49,854  
    

 

 

      

 

 

      

 

 

      

 

 

 

Per-share amount:

                   

Basic

     $ 0.37        $ 0.18        $ 0.77        $ 0.17  
    

 

 

      

 

 

      

 

 

      

 

 

 

Diluted

     $ 0.37        $ 0.17        $ 0.76        $ 0.17  
    

 

 

      

 

 

      

 

 

      

 

 

 

Stock options to purchase 195 and 533 shares of common stock for the three months and 195 and 533 for the six months ended June 30, 2012 and 2011, respectively, were excluded from the computation of diluted earnings per common share as these stock options were antidilutive.

 

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POST PROPERTIES, INC. AND POST APARTMENT HOMES, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share or unit and apartment unit data)

 

 

7.

OPERATING PARTNERSHIP EARNINGS PER UNIT

For the three and six months ended June 30, 2012 and 2011, a reconciliation of the numerator and denominator used in the computation of basic and diluted net income per unit was as follows:

 

     Three months ended
June 30,
   Six months ended
June 30,
             2012                    2011                    2012                    2011        

Net income available to
common unitholders (numerator):

                   

Net income

     $ 21,170        $ 9,834        $ 43,035        $ 12,847  

Noncontrolling interests - consolidated real estate entities

       (35)          (58)          (41)          (47)  

Preferred unit distributions

       (922)          (922)          (1,844)          (2,611)  

Preferred unit redemption costs

       -          -          -          (1,757)  

Unvested restricted stock (allocation of earnings)

       (48)          (29)          (94)          (26)  
    

 

 

      

 

 

      

 

 

      

 

 

 

Net income (loss) available to common unitholders

     $ 20,165        $ 8,825        $ 41,056        $ 8,406  
    

 

 

      

 

 

      

 

 

      

 

 

 

Common units (denominator):

                   

Weighted average units outstanding - basic

       53,923          50,044          53,581          49,630  

Dilutive units from stock options

       323          391          369          394  
    

 

 

      

 

 

      

 

 

      

 

 

 

Weighted average units outstanding - diluted

       54,246          50,435          53,950          50,024  
    

 

 

      

 

 

      

 

 

      

 

 

 

Per-unit amount:

                   

Basic

     $ 0.37        $ 0.18        $ 0.77        $ 0.17  
    

 

 

      

 

 

      

 

 

      

 

 

 

Diluted

     $ 0.37        $ 0.17        $ 0.76        $ 0.17  
    

 

 

      

 

 

      

 

 

      

 

 

 

Stock options to purchase 195 and 533 shares of common stock for the three months and 195 and 533 for the six months ended June 30, 2012 and 2011, respectively, were excluded from the computation of diluted earnings per common unit as these stock options were antidilutive.

 

8.

FAIR VALUE MEASURES AND OTHER FINANCIAL INSTRUMENTS

From time to time, the Company records certain assets and liabilities at fair value. Real estate assets may be stated at fair value if they become impaired in a given period and may be stated at fair value if they are held for sale and the fair value of such assets is below historical cost. Additionally, the Company records derivative financial instruments at fair value. The Company also uses fair value metrics to evaluate the carrying values of its real estate assets and for the disclosure of certain financial instruments. Fair value measurements were determined by management using available market information and appropriate valuation methodologies available to management at June 30, 2012. Considerable judgment is necessary to interpret market data and estimate fair value. Accordingly, there can be no assurance that the estimates discussed herein, using Level 2 and 3 inputs, are indicative of the amounts the Company could realize on disposition of the real estate assets or other financial instruments. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts.

Real estate assets

The Company periodically reviews its real estate assets, including operating assets, construction in progress, land held for future investment and for-sale condominiums, for impairment purposes using Level 3 inputs, primarily comparable sales and market data, independent valuations and discounted cash flow models. For the six months ended June 30, 2012 or 2011, the Company did not recognize any impairment charges related to its real estate assets.

Derivatives and other financial instruments

The Company manages its exposure to interest rate changes through the use of derivative financial instruments, primarily interest rate swap arrangements. In December 2011, the Company entered into three interest rate swap arrangements with substantially similar terms and conditions. These arrangements have an aggregate notional amount of $230,000 and require the Company to pay a blended fixed rate of approximately 1.55% (with the counterparties paying the Company the floating one-month LIBOR rate). Additionally, in January 2012, the Company entered into a fourth interest rate swap arrangement with a notional amount of $70,000 and it will require the Company to pay a fixed rate of approximately 1.50% (with the counterparty paying the Company the floating one-month LIBOR) (together, the “Interest Rate Swaps”). The Interest Rate Swaps will serve as cash flow hedges of amounts outstanding under the

 

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POST PROPERTIES, INC. AND POST APARTMENT HOMES, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share or unit and apartment unit data)

 

 

Company’s variable rate Term Loan (see note 4) entered into in January 2012 and are expected to provide for an effective blended fixed rate for the corresponding amount of Term Loan borrowings, once fully drawn, of approximately 3.44% (subject to any adjustment based on subsequent changes in the Company’s credit ratings). The Interest Rate Swaps terminate in January 2018.

The Interest Rate Swaps are measured and accounted for at fair value on a recurring basis. The Interest Rate Swaps outstanding at June 30, 2012 and December 31, 2011 were valued as net liabilities of $9,907 and $2,641, respectively, primarily using level 2 inputs, as substantially all of the fair value was determined using widely accepted discounted cash flow valuation techniques along with observable market-based inputs for similar types of arrangements. The Company reflects both the respective counterparty’s nonperformance risks and its own nonperformance risks in its fair value measurements using unobservable inputs. However, the impact of such risks was not considered material to the overall fair value measurements of the derivatives. These liabilities are included in accounts payable, accrued expenses and other liabilities on the consolidated balance sheets. Under ASC Topic 815, a corresponding amount is included in accumulated other comprehensive income (loss), an equity account, until the hedged transactions are recognized in earnings. The following table summarizes the effect of these Interest Rate Swaps (designated as cash flow hedges) on the Company’s consolidated statements of operations and comprehensive income for the six months ended June 30, 2012.

 

     Three months ended    Six months ended

Interest Rate Swap / Cash Flow Hedging Instruments

   June 30, 2012    June 30, 2012

Loss recognized in other comprehensive income

     $ (7,740 )      $ (8,000 )
    

 

 

      

 

 

 

Loss reclassified from accumulated other comprehensive income into interest
expense

     $ (473 )      $ (734 )
    

 

 

      

 

 

 

There were no outstanding derivative financial instruments during the six months ended June 30, 2011. The amounts reported in accumulated other comprehensive income as of June 30, 2012 will be reclassified to interest expense as interest payments are made under the hedged indebtedness. Over the next year, the Company estimates that $3,738 will be reclassified from accumulated comprehensive income (loss) to interest expense.

As part of the Company’s on-going procedures, the Company monitors the credit worthiness of its financial institution counterparties and its exposure to any single entity, which it believes minimizes credit risk concentration. The Company believes the likelihood of realized losses from counterparty non-performance is remote. The Interest Rate Swaps are cross defaulted with the Company’s Term Loan and Syndicated Line (see note 4) and contain certain provisions consistent with these types of arrangements. If the Company was required to terminate the Interest Rate Swaps and settle the obligations thereunder as of June 30, 2012, the termination payment by the Company would have been approximately $9,929.

Cash equivalents, rents and accounts receivables, accounts payable, accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair values because of the short-term nature of these instruments. At June 30, 2012, the fair value of fixed rate debt was approximately $801,724 (carrying value of $737,582) and the carrying value of variable rate debt, including the Company’s lines of credit, was approximately $227,834 (carrying value of $230,000). At December 31, 2011, the fair value of fixed rate debt was approximately $885,455 (carrying value of $835,443) and the fair value of variable rate debt, including the Company’s lines of credit, was approximately $137,495 (carrying value of $135,000). Long-term indebtedness was valued using Level 2 inputs, primarily market prices of comparable debt instruments.

In addition, the Company has recorded a contractual license fee obligation associated with one of its condominium communities at fair values of $3,731 and $5,348 at June 30, 2012 and December 31, 2011, respectively. The change in the recorded license fee obligation between periods primarily reflects the payment of license fees on condominiums closed during the period. The contractual obligation was valued using Level 3 inputs, primarily a discounted cash flow model.

 

9.

SEGMENT INFORMATION

Segment description

In accordance with ASC Topic 280, “Segment Reporting,” 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 Company’s chief operating decision makers to manage the business.

 

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POST PROPERTIES, INC. AND POST APARTMENT HOMES, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share or unit and apartment unit data)

 

 

The Company’s chief operating decision makers focus on the Company’s primary sources of income from apartment community rental operations. Apartment community rental operations are generally broken down into 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 property segments” 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, 2011.

 

   

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 the prior year – those apartment communities which reached stabilized occupancy in 2011.

 

   

Development and lease-up communities – those apartment communities that are under development, rehabilitation and lease-up but were not stabilized by the beginning of the current year, including communities that stabilized during the current year.

 

   

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 NOI, including NOI of stabilized communities, as an operating measure. NOI 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 NOI is an important supplemental measure of operating performance for a REIT’s operating real estate because it provides a measure of the core operations, rather than factoring in depreciation and amortization, financing costs and general and administrative expenses 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 NOI, 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 Company’s consolidated statement of operations entitled “net income (loss)” is the most directly comparable GAAP measure to NOI.

 

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POST PROPERTIES, INC. AND POST APARTMENT HOMES, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share or unit and apartment unit data)

 

 

Segment information

The following table reflects each segment’s contribution to consolidated revenues and NOI together with a reconciliation of segment contribution to property NOI to consolidated net income for the three and six months ended June 30, 2012 and 2011. Additionally, substantially all of the Company’s assets relate to the Company’s 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
June  30,
   Six months ended
June 30,
             2012                    2011                    2012                    2011        

Revenues

                   

Fully stabilized communities

     $     75,129        $     69,703        $     148,449        $     137,721  

Development and lease-up communities

       77          -          77          -  

Acquired communities

       1,091          -          2,149          -  

Other property segments

       5,657          5,494          11,333          10,791  

Other

       206          227          428          443  
    

 

 

      

 

 

      

 

 

      

 

 

 

Consolidated revenues

     $ 82,160        $ 75,424        $ 162,436        $ 148,955  
    

 

 

      

 

 

      

 

 

      

 

 

 

Contribution to Property Net Operating Income

                   

Fully stabilized communities

     $ 46,202        $ 41,850        $ 91,268        $ 82,476  

Development and lease-up communities

       (161 )        -          (161 )        -  

Acquired communities

       583          -          1,168          -  

Other property segments, including corporate management expenses

       99          141          (135 )        213  
    

 

 

      

 

 

      

 

 

      

 

 

 

Consolidated property net operating income

       46,723          41,991          92,140          82,689  
    

 

 

      

 

 

      

 

 

      

 

 

 

Interest income

       288          516          339          608  

Other revenues

       206          227          428          443  

Depreciation

       (19,497 )        (18,808 )        (38,838 )        (37,560 )

Interest expense

       (11,103 )        (14,437 )        (22,748 )        (28,912 )

Amortization of deferred financing costs

       (698 )        (721 )        (1,359 )        (1,368 )

General and administrative

       (3,883 )        (4,246 )        (8,168 )        (8,362 )

Investment and development

       (322 )        (296 )        (802 )        (774 )

Other investment costs

       (306 )        (455 )        (612 )        (949 )

Gains on condominium sales activities, net

       8,530          5,432          15,434          6,176  

Equity in income of unconsolidated real estate entities, net

       495          346          6,941          555  

Other income, net

       737          285          581          301  

Net loss on extinguishment of indebtedness

       -          -          (301 )        -  
    

 

 

      

 

 

      

 

 

      

 

 

 

Net income

     $ 21,170        $ 9,834        $ 43,035        $ 12,847  
    

 

 

      

 

 

      

 

 

      

 

 

 

 

10.

SEVERANCE COSTS

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 related to aggregate net severance charges for such executive officers for the six months ended June 30, 2012 and 2011:

 

     Six months ended
June 30,
             2012                    2011        

Accrued severance charges, beginning of period

     $     3,518        $     5,441  

Payments for period

       (1,254 )        (1,353 )

Interest accretion

       108          157  
    

 

 

      

 

 

 

Accrued severance charges, end of period

     $ 2,372        $ 4,245  
    

 

 

      

 

 

 

 

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POST PROPERTIES, INC. AND POST APARTMENT HOMES, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share or unit and apartment unit data)

 

 

11.

STOCK-BASED COMPENSATION PLANS

As the primary operating subsidiary of the Company, the Operating Partnership participates in and bears the compensation expenses associated with the Company’s stock-based compensation plans. The information discussed below relating to the Company’s stock-based compensation plans is also applicable for the Operating Partnership.

Incentive stock plans

Incentive stock awards are granted under the Company’s 2003 Incentive Stock Plan, as amended and restated in October 2008 (the “2003 Stock Plan”). Under the 2003 Stock Plan, an aggregate of 3,469 shares of common stock were reserved for issuance. 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, 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). The exercise price of each option granted under the 2003 Stock Plan may not be less than the market price of the Company’s 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.

Compensation costs for stock options have been estimated on the grant date using the Black-Scholes option-pricing method. The weighted average assumptions used in the Black-Scholes option-pricing model are as follows:

 

     Six months ended
June  30,
               2012                        2011           

Dividend yield

   2.0%   2.2%

Expected volatility

   43.3%   42.4%

Risk-free interest rate

   1.1%   2.7%

Expected option term (years)

   6.0 years   6.0 years

The Company’s assumptions were derived from the methodologies discussed herein. The expected dividend yield reflects the Company’s current historical yield, which was expected to approximate the future yield. Expected volatility was based on the historical volatility of the Company’s 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 Company’s historical data for prior period stock option exercise and forfeiture activity.

Restricted stock

Compensation cost for restricted stock is amortized ratably into compensation expense over the applicable vesting periods. Total compensation expense related to restricted stock was $521 and $476 for the three months and $1,080 and $976 for the six months ended June 30, 2012 and 2011, respectively. At June 30, 2012, there was $3,299 of unrecognized compensation cost related to restricted stock. This cost is expected to be recognized over a weighted average period of 2.1 years.

A summary of the activity related to the Company’s restricted stock for the six months ended June 30, 2012 and 2011 is as follows:

 

     Six months ended June 30,
     2012    2011
             Shares                   Weighted-Avg.         
Grant-Date

Fair Value
           Shares                   Weighted-Avg.         
Grant-Date

Fair Value

Unvested share, beginning of period

       84       $     29          129       $     19  

Granted (1)

       50         44          41         37  

Vested

       (5 )       30          (1 )       15  
    

 

 

          

 

 

     

Unvested shares, end of period

       129         35          169         24  
    

 

 

          

 

 

     

 

(1)

The total value of the restricted share grants for the six months ended June 30, 2012 and 2011 was $2,184 and $1,532, respectively.

 

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POST PROPERTIES, INC. AND POST APARTMENT HOMES, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share or unit and apartment unit data)

 

 

Stock options

Compensation cost for stock options is amortized ratably into compensation expense over the applicable vesting periods. The Company recorded compensation expense related to stock options of $91 and $92 for the three months and $201 and $186 for the six months ended June 30, 2012 and 2011, respectively, under the fair value method. At June 30, 2012, there was $598 of unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted average period of 2.1 years.

A summary of stock option activity under all plans for the six months ended June 30, 2012 and 2011, is presented below:

 

     Six months ended June 30,
     2012    2011
             Shares                   Exercise        
Price
           Shares                   Exercise        
Price

Options outstanding, beginning of period

           1,501       $     31          2,068       $     31  

Granted

       29         44          25         37  

Exercised

       (622 )       29          (466 )       29  

Expired

               0          (10 )       38  
    

 

 

          

 

 

     

Options outstanding, end of period (1)

       908         33          1,617         31  
    

 

 

          

 

 

     

Options exercisable, end of period (1)

       840         33          1,464         33  
    

 

 

          

 

 

     

Options vested and expected to vest, end of period (1)

       905         33          1,610         31  
    

 

 

          

 

 

     

Weighted average fair value of options granted during the period

     $ 15.18            $ 13.18      
    

 

 

          

 

 

     

 

(1)

At June 30, 2012, the aggregate intrinsic value of stock options outstanding, exercisable and vested/expected to vest was $14,303, $13,292 and $14,248, respectively. At that same date, the weighted average remaining contractual lives of stock options outstanding, exercisable and vested/expected to vest was 3.7 years, 3.3 years and 3.7 years, respectively.

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. The total intrinsic value of stock options exercised for the six months ended June 30, 2012 and 2011 was $11,569 and $4,180, respectively.

At June 30, 2012, the Company segregated its outstanding options into two ranges, based on exercise prices, as follows:

 

Option Ranges

   Options Outsanding    Options Exercisable
             Shares                Weighted Avg.    
Exercise Price
       Weighted Avg.    
Life (Years)
       Shares            Weighted Avg.    
Exercise Price

$12.22 - $32.53

       499        $     25          3.2          477        $     25  

$34.90 - $48.00

       409          44          4.3          363          44  
    

 

 

                

 

 

      

 

 

 

Total

       908          33          3.7          840          33  
    

 

 

                

 

 

      

 

 

 

Employee stock purchase plan

The Company maintains an Employee Stock Purchase Plan (the “ESPP”) approved by Company shareholders in 2005. The maximum number of shares issuable under the ESPP 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 $98 and $30 for the three months and $146 and $116 for the six months ended June 30, 2012 and 2011, respectively.

 

12.

INCOME TAXES

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (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 management’s current intention to adhere to these

 

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POST PROPERTIES, INC. AND POST APARTMENT HOMES, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share or unit and apartment unit data)

 

 

requirements and maintain the Company’s 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 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.

The Operating Partnership files tax returns as a limited partnership under the Code. As a partnership, the income and losses of the Operating Partnership are allocated to its partners, including the Company, for inclusion in their respective income tax returns. Accordingly, no provision or benefit for income taxes has been included in the accompanying financial statements. The Operating Partnership intends to make sufficient cash distributions to the Company to enable it to meet its annual REIT distribution requirements.

In the preparation of income tax returns in federal and state jurisdictions, the Company, the Operating Partnership and their 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, the Operating Partnership and their subsidiaries’ (including the taxable REIT subsidiaries (“TRSs”)) income tax returns are subject to examination by federal and state tax jurisdictions for years 2008 through 2010. Net income tax loss carryforwards and other tax attributes generated in years prior to 2008 are also subject to challenge in any examination of the 2008 to 2010 tax years.

As of June 30, 2012 and December 31, 2011, the Company’s 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 uncertainty surrounding this unrecognized tax benefit will generally be clarified in future periods as income tax loss carryforwards are utilized. To the extent these unrecognized tax benefits are ultimately recognized, they may affect the effective tax rate in a future period. The Company’s 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 six months ended June 30, 2012 and 2011, were not material to the Company’s results of operations, cash flows or financial position.

The TRSs are utilized principally to perform such non-REIT activities as asset and property management, for-sale housing (condominiums) sales and other services. These TRSs are subject to federal and state income taxes. For the six months ended June 30, 2012, the TRSs recognized an income tax benefit of $612 related to the expected recovery of income taxes paid in prior years upon the filing of amended tax returns to utilize net operating loss carryback claims to such years. The income tax benefit was included in condominium gains on the consolidated statement of operations as the income taxes paid in such prior years primarily resulted from condominium activities. Other than the tax benefit related to this carryback claim in 2012, the TRSs recorded no net income tax expense (benefit) for federal income taxes for the three or six months ended June 30, 2012 and 2011, as a result of estimated taxable losses and the inability to recognize tax benefits related to such losses due to the uncertainty surrounding their ultimate realization.

The Company’s net deferred tax assets primarily reflect real estate asset basis differences between carrying amounts for financial and income tax reporting purposes, income tax loss carryforwards and the timing of income and expense recognition for certain accrued liabilities and transactions. At December 31, 2011, net deferred tax assets totaled approximately $60,197. At December 31, 2011, management had established valuation allowances to offset such net deferred tax assets due primarily to historical losses at the TRSs in prior years and the variability of the income (loss) 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. For the six months ended June 30, 2012, changes to the components of net deferred tax assets were offset by changes to deferred tax asset valuation allowances.

 

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POST PROPERTIES, INC. AND POST APARTMENT HOMES, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share or unit and apartment unit data)

 

 

13.

LEGAL PROCEEDINGS, COMMITMENTS AND CONTINGENCIES

In September 2010, the United States Department of Justice (the “DOJ”) filed a lawsuit against the Company in the United States District Court for the Northern District of Georgia. The 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 in the District of Columbia, Virginia, Florida, Georgia, New York, North Carolina and Texas. The plaintiff seeks statutory damages and a civil penalty in unspecified amounts, as well as injunctive relief that includes retrofitting apartments and public use areas to comply with the FHA and the ADA and prohibiting construction or sale of noncompliant units or complexes. The Company filed a motion to transfer the case to the United States District Court for the District of Columbia, where a previous civil case involving alleged violations of the FHA and ADA by the Company was filed and ultimately dismissed. On October 29, 2010, the United States District Court for the Northern District of Georgia issued an opinion finding that the complaint shows that the DOJ’s claims are essentially the same as the previous civil case, and, therefore, granted the Company’s motion and transferred the DOJ’s case to the United States District Court for the District of Columbia. Limited discovery is proceeding as permitted by the Court. Due to the preliminary nature of the litigation, it is not possible to predict or determine the outcome of the legal proceeding, nor is it possible to estimate the amount of loss, if any, that would be associated with an adverse decision.

The Company is involved in various other legal proceedings incidental to their business from time to time, most of which are expected to be covered by liability or other insurance. Management of the Company believes that any resolution of pending proceedings or liability to the Company which may arise as a result of these various other legal proceedings will not have a material adverse effect on the Company’s results of operations or financial position.

 

14.

SUBSEQUENT EVENTS

The Company evaluated the accounting and disclosure requirements for subsequent events reporting through the issuance date of the financial statements. In July 2012, the Company acquired a 360-unit apartment community, including approximately 7,612 square feet of retail space, located in Charlotte, North Carolina for a purchase price of $74,000. In July 2012, the Company borrowed the remaining available capacity of $70,000 under its existing Term Loan (see note 4).

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited, in thousands, except per share or unit and apartment unit data)

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Company overview

Post Properties, Inc. (the “Company”) and its subsidiaries develop, own and manage upscale multi-family apartment communities in selected markets in the United States. The Company through its wholly-owned subsidiaries is the sole general partner, a limited partner and owns a majority interest in Post Apartment Homes, L.P. (the “Operating Partnership”), a Georgia limited partnership. The Operating Partnership, through its operating divisions and subsidiaries conducts substantially all of the on-going operations of the Company, a publicly traded corporation which operates as a self-administered and self-managed real estate investment trust (“REIT”). As used herein, the term “Company” includes Post Properties, Inc. and its subsidiaries, including Post Apartment Homes, L.P., unless the context indicates otherwise.

The Company has elected to qualify and operate as a self-administrated and self-managed 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. The Operating Partnership is governed under the provisions of a limited partnership agreement, as amended. 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 Internal Revenue Code.

At June 30, 2012, the Company had interests in 21,622 apartment units in 58 communities, including 1,471 apartment units in four communities held in unconsolidated entities and 1,810 apartment units in six communities currently under development or in lease-up. The Company is also selling luxury for-sale condominium homes in two communities through a taxable REIT subsidiary. At June 30, 2012, approximately 33.4%, 23.8%, 13.0% and 10.7% (on a unit basis) of the Company’s operating communities were located in the Atlanta, Georgia, Dallas, Texas, the greater Washington, D.C. and Tampa, Florida metropolitan areas, respectively.

At June 30, 2012, the Company owned approximately 99.7% of the common limited partnership interests (“Common Units”) in the Operating Partnership. Common Units held by persons other than the Company represented a 0.3% common noncontrolling interest in the Operating Partnership.

The discussion below is combined for the Company and the Operating Partnership as their results of operations and financial condition are substantially the same except for the effect of the 0.3% weighted average common noncontrolling interest in the Operating Partnership.

Operations Overview

The following discussion provides an overview of the Company’s operations, and should be read in conjunction with the more full discussion of the Company’s operating results, liquidity and capital resources and risk factors reflected elsewhere in this Form 10-Q.

Property Operations

A gradually improving economy in the United States, favorable demographics and an outlook of modest new supply of multi-family units in the near term have contributed to improving apartment fundamentals in the Company’s markets since 2010. As a result, year-over-year same store revenues and net operating income (“NOI”) increased by 7.8% and 10.7%, respectively, in the first half of 2012, as compared to the first half of 2011. The Company’s operating results for the second quarter and first half of 2012, and its outlook for the remainder of 2012 are more fully discussed in the “Results of Operations” and “Outlook” sections below. The Company’s outlook for the remainder of 2012 is based on the expectation that economic and employment conditions will continue to gradually improve. However, there continues to be significant risks and uncertainty in the economy and the unemployment rate continues to be higher than normal. If the economic recovery was to stall or U.S. economic conditions were to worsen, the Company’s operating results would be adversely affected. Furthermore, the environment for multi-family rental development starts has been improving, and over time, the Company expects that this will impact competitive supply in the markets in which it operates.

Acquisition Activity

In December 2011, the Company acquired Post Katy Trail™, a 227-unit apartment community located in Uptown Dallas, Texas for a purchase price of $48,500. The community was completed in 2010 and includes 9,080 square feet of retail space that is currently 100% leased. Operating results for the three and six months ended June 30, 2012 includes property revenues of $1,091 and $2,149, respectively, and net operating income of $583 and $1,168, respectively, from this community.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited, in thousands, except per share or unit and apartment unit data)

 

 

In July 2012, the Company acquired Post South End™, a 360-unit apartment community located in Charlotte, North Carolina for a purchase price of $74,000. The community was completed in 2009 and includes approximately 7,612 square feet of retail space.

Development Activity

The Company continues to develop six communities: (1) the second phase of its Post Carlyle Square™ apartment community in Alexandria, Virginia, planned to consist of 344 apartment units with a total estimated development cost of approximately $89,000, which began delivering units in the second quarter of 2012 and was 20.0% leased as of July 27, 2012, (2) its Post South Lamar™ apartment community in Austin, Texas, planned to consist of 298 apartment units and approximately 8,555 square feet of retail space with a total estimated development cost of approximately $41,700, (3) the third phase of its Post Midtown Square® apartment community in Houston, Texas, planned to consist of 124 apartment units and approximately 10,864 square feet of retail space with a total estimated development cost of approximately $21,800, (4) its third phase of its Post Lake® at Baldwin Park apartment community in Orlando, Florida, planned to consist of 410 luxury apartment units with a total estimated development cost of approximately $58,600, (5) its Post Parkside™ at Wade apartment community, which marks the Company’s first development in Raleigh, North Carolina, planned to consist of 392 apartment units, and approximately 18,148 square feet of retail space, with a total estimated development cost of approximately $55,000 and (6) its Post Richmond Avenue™ apartment community in Houston, Texas, planned to consist of 242 apartment units with an estimated development cost of approximately $34,300. The square footage amounts are approximate and actual amounts may vary. The Company expects to initially fund estimated future construction expenditures primarily by utilizing available borrowing capacity under its unsecured bank credit facilities and utilizing net proceeds from on-going condominium sales and its at-the-market common equity sales program.

In addition, the Company may commence development activities at more of its existing land sites over the next year or so. Management believes, however, that the timing of such development starts will depend largely on a continued favorable outlook for apartment and capital market conditions and the U.S. economy, which management believes will positively influence conditions in employment and the local real estate markets. Until such time as additional development activities commence or certain land positions are sold, the Company expects that operating results will be adversely impacted by costs of carrying land held for future investment or sale. There can be no assurance that land held for investment will be developed in the future or at all. Although the Company does not believe that any impairment exists at June 30, 2012, should the Company change its expectations regarding the timing and projected undiscounted future cash flows expected from land held for future investment, or the estimated fair value of its assets, the Company could be required to recognize impairment losses in future periods.

Condominium Activity

The Company has two luxury condominium development projects which began closing sales of completed units in 2010: The Ritz-Carlton Residences, Atlanta Buckhead (the “Atlanta Condominium Project”), consisting of 129 units, and the Four Seasons Private Residences, Austin (the “Austin Condominium Project”), consisting of 148 units. The Company does not expect to further engage in the for-sale condominium business in future periods, other than with respect to completing the sell-out of units at these two projects. The Company’s intention over time is to liquidate its investment in these two condominium projects and to redeploy the invested capital back into its core apartment business.

The Company’s investment in for-sale condominium housing exposes the Company to additional risks and challenges, including potential future losses or additional impairments, which could have an adverse impact on the Company’s business, results of operations and financial condition. See Item 1A, “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2011 for a discussion of these and other Company risk factors. Specifically, the condominium market has been adversely impacted in recent years by the overall weakness in the U.S. economy and residential housing markets, and tighter credit markets for home purchasers, which the Company believes has negatively impacted the ability of some prospective condominium buyers to qualify for mortgage financing. The Company expects that the above-described condominium market conditions will remain in the near term, and the modest pace of condominium sales and closings will continue during the remainder of 2012. However, the Company has noted that the pace of condominium sales activity has increased moderately during the first half of 2012.

As of July 27, 2012, the Company had 6 units under contract and 109 units closed at the Austin Condominium Project and had 18 units under contract and 55 units closed at the Atlanta Condominium Project. Units “under contract” include all units currently under contract. However, the Company has experienced contract terminations in these and other condominium projects when units become available for delivery and may experience additional terminations in connection with these projects. Accordingly, there can be no assurance that units under contract for sale will actually close. At June 30, 2012, the Company’s investment in these two condominium projects totaled $40,353 as reflected on its consolidated balance sheet.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited, in thousands, except per share or unit and apartment unit data)

 

 

Risk of future condominium impairment losses

The Company recorded impairment losses in prior years related to the Austin Condominium Project and the Atlanta Condominium Project. The Company recorded a $34,691 impairment charge in 2010 at the Austin Condominium Project and, in the aggregate, recorded $89,883 of impairment charges in 2009 and 2010 at the Atlanta Condominium Project and an adjacent land site. The Company evaluated the fair value of the Austin Condominium Project and the Atlanta Condominium Project as of June 30, 2012, and determined that no additional impairment existed as of that date. The model assumptions used to determine the fair value of these projects were based on current cash flow projections over the remaining expected sell-out periods and using market discount rates, which reflect the current status of sales, sales prices and other market factors at each of the condominium projects. There can be no assurance that the Company’s cash flow projections will not change in future periods and that the estimated fair value of the Austin Condominium Project and the Atlanta Condominium Project will not change materially as a consequence, causing the Company to possibly record additional impairment charges in future periods.

The following discussion should be read in conjunction with all of the accompanying consolidated financial statements appearing elsewhere in this report. See the summary financial information in the section below titled, “Results of Operations.”

Disclosure Regarding Forward-Looking Statements

Certain statements made in this report, and other written or oral statements made by or on behalf of the Company, may constitute “forward-looking statements” within the meaning of the federal securities laws. In addition, the Company, or the executive officers on the Company’s behalf, may from time to time make forward-looking statements in reports and other documents the Company files with the SEC or in connection with oral statements made to the press, potential investors or others. Statements regarding future events and developments and the Company’s future performance, as well as management’s expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. Forward-looking statements include statements preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “plans,” “estimates,” “should,” or similar expressions. Examples of such statements in this report include expectations regarding economic conditions, the Company’s anticipated operating results in 2012, expectations regarding future impairment charges, expectations regarding engagement in the for-sale condominium business, anticipated sales of for-sale condominium homes, including expectations regarding demand for for-sale housing and gains (losses) on for-sale housing sales activity, anticipated construction and development activities (including projected costs, timing and anticipated potential sources of financing of future development activities), expectations regarding cash flows from operating activities, expected costs of development, investment, interest and other expenses, expectations regarding the use of proceeds from, outstanding borrowings under and effective interest rates under the Company’s unsecured term loan and revolving credit facilities, expectations regarding compensation costs for stock-based compensation, expectations regarding the delivery of apartment units at lease-up communities, the Company’s expected debt levels, the expected prepayment of indebtedness, expectations regarding the availability of additional capital, unsecured and secured financing, the anticipated dividend level in 2012 and expectations regarding the source of funds for payment of the dividend, expectations regarding the Company’s ability to execute its 2012 business plan and to meet short-term and long-term liquidity requirements, including capital expenditures, development and construction expenditures, land and apartment community acquisitions, dividends and distributions on its common and preferred equity and debt service requirements and long-term liquidity requirements including maturities of long-term debt and acquisition and development activities, the Company’s expectations regarding asset acquisitions and sales in 2012, the Company’s expectations regarding the use of joint venture arrangements, expectations regarding the Company’s at-the-market common equity program and the use of proceeds thereof, expectations regarding the DOJ matter and the outcome of and insurance coverage for other legal proceedings, and expectations regarding the Company’s ability to maintain its REIT status under the Internal Revenue Code. Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on beliefs and assumptions of the Company’s management, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding the market for the Company’s apartment communities, demand for apartments in the markets in which it operates, competitive conditions and general economic conditions. These assumptions could prove inaccurate. The forward-looking statements also involve risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond the Company’s ability to control or predict. Such factors include, but are not limited to, the following:

 

   

The success of the Company’s business strategies described on pages 2 to 3 of the Company’s Form 10-K for the year ended December 31, 2011 (the “Form 10-K”);

   

Conditions affecting ownership of residential real estate and general conditions in the multi-family residential real estate market;

   

Uncertainties associated with the Company’s real estate development and construction;

   

Uncertainties associated with the timing and amount of apartment community sales;

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited, in thousands, except per share or unit and apartment unit data)

 

 

   

Exposure to economic and other competitive factors due to market concentration;

   

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;

   

The Company’s ability to generate sufficient cash flows to make required payments associated with its debt financing;

   

The effects of the Company’s leverage on its risk of default and debt service requirements;

   

The impact of a downgrade in the credit rating of the Company’s securities;

   

The effects of a default by the Company or its subsidiaries on an obligation to repay outstanding indebtedness, including cross-defaults and cross-acceleration under other indebtedness or the responsibility for recourse guarantees;

   

The effects of covenants of the Company’s or its subsidiaries’ mortgage indebtedness on operational flexibility and default risks;

   

The effects of any decision by the government to eliminate Fannie Mae or Freddie Mac or reduce government support for apartment mortgage loans;

   

The Company’s ability to maintain its current dividend level;

   

Uncertainties associated with the Company’s for-sale condominium housing business, including the timing and volume of condominium sales;

   

The impact of any additional charges the Company may be required to record in the future related to any impairment in the carrying value of its assets;

   

The impact of competition on the Company’s business, including competition for residents in the Company’s apartment communities and buyers of the Company’s for-sale condominium homes and development locations;

   

The Company’s ability to compete for limited investment opportunities;

   

The effect of changes in interest rates and the effectiveness of interest rate hedging contracts;

   

The success of the Company’s acquired apartment communities;

   

The Company’s ability to succeed in new markets;

   

The costs associated with compliance with laws requiring access to the Company’s properties by persons with disabilities;

   

The impact of the Company’s ongoing litigation with the U.S. Department of Justice (“DOJ”) regarding the Americans with Disabilities Act and the Fair Housing Act (including any award of compensatory or punitive damages or injunctive relief requiring the Company to retrofit apartments or public use areas or prohibiting the sale of apartment communities or condominium units) as well as the impact of other litigation;

   

The effects of losses from natural catastrophes in excess of insurance coverage;

   

Uncertainties associated with environmental and other regulatory matters;

   

The Company’s ability to control joint ventures, properties in which it has joint ownership and corporations and limited partnership in which it has partial interests;

   

The Company’s ability to renew leases or relet units as leases expire;

   

The Company’s ability to continue to qualify as a REIT under the Internal Revenue Code;

   

The Operating Partnership’s ability to continue to be treated as a partnership under the Internal Revenue Code;

   

The effects of changes in accounting policies and other regulatory matters detailed in the Company’s