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MMSW Equity Research Post Properties, Inc. An Investment Strategy Analysis Scott Kwiecinski Michael Morey Mark Frey Wintford Thornton April 28, 2004
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MMSW Equity Research
Post Properties, Inc.An Investment Strategy Analysis
Scott KwiecinskiMichael MoreyMark FreyWintford Thornton
April 28, 2004
MMSW Equity Research
Analysis Agenda
1. Investment Recommendation2. Multi-Family Sector Update3. Post Properties Overview4. Post’s Core Markets5. Growth Strategy6. Peer Comparison7. Investment Risks8. Management9. Conclusion10.Questions
MMSW Equity Research
Investment Recommendation
Minimal diversification, branding effectWeak core markets, over-supply a problemAsset disposition leads to reduced revenueInvestment risks
Trading price as of April 14, 2004 $ 26.27
MMSW recommends a SELL position for Post Properties
Estimated Value (MMSW) $ 15.64
#1:#2:#3:#4:
Investment Thesis:
MMSW Equity 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
Other6.5%
Tampa7.9%
Dallas18.6%
Atlanta53.5%
Houston3.5%
Washington, D.C.2.8%
Orlando3.5%
Charlotte3.8%
Nearly 80% Total NOI
Post Portfolio Geographic Concentration
MMSW Equity Research
Post’s Core Markets – Atlanta
1,5001,6001,7001,8001,9002,0002,1002,2002,3002,400
1990 1992 1994 1996 1998 2000 2002 2004
Jobs
(Tho
usan
ds)
• 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 revenueAtlanta Total Employment
Source: Bureau of Economic Analysis
MMSW Equity Research
Post’s Core Markets – Atlanta Cont’d
• Over supply causes riskiness in Post’s financial healthOver 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
MMSW Equity 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
MMSW Equity 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
MMSW Equity Research
Post’s Core Markets – Summary
Post Properties Occupancy Trends in Core Markets
Source: Post Properties Reports
88%
90%
92%
94%
96%
98%
2Q02
3Q02
4Q02
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
Occ
upan
cy
AtlantaDallasTampa
MMSW Equity 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 risk2. Repurchase shares of preferred stock3. 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
MMSW Equity 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
MMSW Equity 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.
MMSW Equity 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
MMSW Equity 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
Rev
enue
($ M
illio
ns)
Post Total Revenue
MMSW Equity Research
Valuation Methodology
• FCFE analysis Estimated equity discount rate = 12.82% Branding sensitivity analysis = 10.50%
Branding Effect High LowDiscount Rate 12.82% 10.50%Price/Share $15.64 $18.61
• FFO per share analysis Historic price multiple = 11.00 Price/share = $19.36
MMSW Equity Research
Conclusion
MMSW Equity Research
Questions?
Scott Kwiecinski(608) [email protected]
Michael Morey(734) [email protected]
Mark Frey(608) [email protected]
Wintford [email protected]
MMSW Equity 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
