The document provides an investment analysis of Post Properties, Inc. by MMSW Equity Research. It recommends selling Post Properties due to oversupply issues in its core Atlanta and Dallas markets, which will reduce revenue from asset sales and dispositions. While Post aims to diversify geographically and improve its balance sheet, these strategies are not expected to significantly impact financials within 12 months. The analysis cites risks to earnings and dividends from continued NOI declines and high leverage. Based on revenue and FCFE assumptions, the report estimates Post's value at $15.64 per share.
3. MMSWEquity Research
Investment Recommendation
Minimal diversification, branding effect
Weak core markets, over-supply a problem
Asset disposition leads to reduced revenue
Investment risks
Trading price as of April 14, 2004 $ 26.27
MMSW recommends a SELL position for Post Properties
Estimated Value (MMSW) $ 15.64
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Investment Thesis:
4. MMSWEquity Research
Post Properties Overview
• Headquartered in
Atlanta
• Develop, manage, and
own high quality
multifamily
communities
• 28,000+ units in
portfolio, 500 under
construction
• Two primary markets
Atlanta
Dallas
Other
6.5%
Tampa
7.9%
Dallas
18.6%
Atlanta
53.5%
Houston
3.5%
Washington, D.C.
2.8%
Orlando
3.5%
Charlotte
3.8%
Nearly 80%
Total NOI
Post Portfolio Geographic Concentration
5. MMSWEquity Research
Post’s Core Markets – Atlanta
1,500
1,600
1,700
1,800
1,900
2,000
2,100
2,200
2,300
2,400
1990 1992 1994 1996 1998 2000 2002 2004
Jobs(Thousands)
• Represents 53.5% of total portfolio
• Historically a high growth market results in over-supply
Among fastest growing MSA’s in 1990’s (pop. and employment)
Fortuitous economy has spurred much residential development
• Asset disposition (and no acquisition) decreases revenue
Atlanta Total Employment
Source: Bureau of Economic Analysis
6. MMSWEquity Research
Post’s Core Markets – Atlanta Cont’d
• Over supply causes riskiness in Post’s financial health
Over supply in multi-family residential
Renter’s market – concessions
necessary to induce lease signing
Rental revenue decrease
Reduced earnings and value estimates
Supply/demand imbalance will postpone recovery until at least 2005
7. MMSWEquity Research
Post’s Core Markets – Dallas
• Represents 18.6% of total portfolio
• Many similarities between Dallas and Atlanta
• Dallas market specifics:
Over-building fueled by Telecom boom in 1990’s
Slightly lower occupancy rates compared with Atlanta
Absorption rates still suppressed
Lingering concessions keep effective rents low
Dallas market not on pace to improve as quickly as
Atlanta
8. MMSWEquity Research
Post’s Core Markets – Tampa
• Represents 7.9% of total portfolio
• Better short-term outlook than Dallas or Atlanta
• Tampa market specifics:
Over-supply generally not an issue
2004 Estimate: New Supply = 4,700 units
New Demand = 4,800 units
Scarcity of developable land
Disciplined construction industry
Highest core market occupancy rates in 2003
Good market but relatively small portfolio allocation
9. MMSWEquity Research
Post’s Core Markets – Summary
Post Properties Occupancy Trends in Core Markets
Source: Post Properties Reports
88%
90%
92%
94%
96%
98%
2Q
02
3Q
02
4Q
02
1Q
03
2Q
03
3Q
03
4Q
03
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
Occupancy
Atlanta
Dallas
Tampa
10. MMSWEquity Research
Growth Strategy
• Post continues to divest underperforming assets
• Expected sale of approximately $270 million of properties
• Proceeds from asset sale serve 3 functions:
1. Pay down variable rate debt, reducing interest rate risk
2. Repurchase shares of preferred stock
3. Acquire properties in markets with high barriers to entry
• Company Goals
- Reduce exposure to Dallas and Atlanta markets
Geographic diversification of core assets
- Restructure and improve balance sheet
11. MMSWEquity Research
Growth Strategy – Impact in the Short
Run
• Analysis and subsequent recommendation is based upon a 12
month investment horizon.
• We do not expect Post to feel substantial effects from disposition
strategy for an extended period of time - Why Not??
Limited opportunities for further acquisitions
Ramping up of development pipeline likely will not deliver
benefit until 2005/2006
Effectiveness of growth strategy unknown and
management’s effectiveness remains a liability
12. MMSWEquity Research
Peer Comparison
• Consensus estimates of FFO growth in 2004 for Post Properties
falls well below that of industry peers
- Post Properties: - 4.5%
- Industry Estimate: 3.8%
• Debt to asset ratio remains high relative to multifamily competition
• Poorly positioned to take advantage of any possible recovery or
improvement in national multifamily market fundamentals.
13. MMSWEquity Research
Investment Risks
• NOI growth expected to remain negative in core markets through ‘04
• Geographic concentration -
Where will Post focus its acquisition/development efforts
• Leverage / Capital market risk
• Sustainability of dividend -
Company maintains 115% AFFO payout ratio
Given asset sales and subsequently low earnings estimates,
the threat of an dividend reduction remains likely
14. MMSWEquity Research
Key Revenue Assumptions in FCFE Valuation
• Unit decline in core
markets (Georgia,
Texas)
• Unit growth in three
markets (Florida, D.C.,
Tennessee)
• Rent increase = 2.5%
• Vacancy rate remains
same as recent history
• Asset growth negative in
2004, regains
momentum by 2005
250
260
270
280
290
300
310
320
330
340
2001 2002 2003 2004 2005 2006
Revenue($Millions)
Post Total Revenue
18. MMSWEquity Research
Multi-Family Sector Update
• General Economy
Interest rates
Employment
• Apartment Specifics
Low urban multi-family cap rates (8.23% average)
Higher vacancy rates (6% in 2004, 3.6% in 2002)
Decreasing apartment construction
Demographics suggest positive outlook for long-term
Strong growth in sector not likely until at least 2005
