Executives
Dave Stockert - President & CEO
Jamie Teabo - EVP, Property Management
Chris Papa - EVP & CFO
Analysts
Michael Salinsky - RBC Capital Markets
Eric Wolff - Citi
Michelle Ko - Bank of America
Andrew McCulloch - Green Street Advisors
Karin Ford - KeyBanc
Post Properties Inc. (PPS) Q2 2010 Earnings Call Transcript August 3, 2010 10:00 AM ET
Operator
Good day, everyone and welcome to the Post Properties second quarter 2010 earnings conference call. This call is being recorded. Today's question-and-answer session will be conducted electronically. (Operator Instructions)
At this time, I will turn the call over to Post Properties President and Chief Executive Officer, Mr. Dave Stockert for opening remarks and introductions. Please go ahead, sir.
Dave Stockert
Thank you very much and good morning. This is Dave Stockert, with me are Chris Papa, our CFO; and Jamie Teabo, Head of Property Management. Welcome to Post Properties second quarter conference call. Statements made on this call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. A number of factors could cause actual results to differ materially from those anticipated, including those discussed in the risk factors section of our 2009 annual report on Form 10-K.
Forward-looking statements are made based on current expectations, assumptions and beliefs as well as information available to us at this time. Post Properties undertakes no obligation to update any information discussed on this conference call. During this call we will discuss certain non-GAAP financial measures. Reconciliations to comparable GAAP financial measures can be found in our earnings release and supplemental financial data.
I'll now begin the business of this call. The company produced better-than-expected operating results in the second quarter, with FFO before impairment charges of $0.37 per share. Earlier this year, we laid out ways we intended to drive earnings in cash flow and that effort is paying off. We're taking advantage of improving conditions to push rents and occupancy.
We're stabilizing our properties and lease up in order to optimize their contribution to cash flow and are moving non-earning land assets into production or sale and mitigating the risks going forward of the condominium business, all while maintaining a strong and liquid balance sheet.
Based on performance to-date and expectations for the rest of the year, we raised earnings guidance for 2010 in a meaningful way.
Turning to same-store results, we produced 1% sequential increase in revenues in the second quarter and a 3% sequential increase in net operating income. Both, average rents and occupancy were up sequentially for the three months ended June 30. The positive sequential revenue trend continued in July.
Rents on both new and renewed leases are increasing on average compared to the in place rent roll and at 95.2% in the second quarter, average economic occupancy is as high as it has been in nearly two years. The outlook for supply and a demand in our markets remained favorable. In addition to driving revenue, we've also held the line on expenses, with particular success renewing insurance coverage and appealing property taxes.
The core portfolio which is the most important contributor to earnings and cash flow is positioned well. Building on the improving outlook for our business, we announced the development of Phase 2 of Post Carlyle Square. This project is a companion to a successful Phase I. It is located the in the submarket of Alexandria, Virginia that has been more resilient through the latest economic cycle.
Because of the strong rents at Phase I and favorable construction pricing, we expect to produce an attractive return even using underwriting that does not depend on future rent increases. This development will be a high quality addition to post Washington, D.C. footprint delivering apartment units beginning in 2012. We expect to fund the development at least initially through line borrowings and from the proceeds of condominium sales.
As conditions for multi-family strengthens across our markets, we are assessing each existing land position for future development, none though would start before 2011. Two parts of land are currently under contract to sell with closings that may occur later this year.
In our condominium business, we've so far closed 23 units at the Austin Project and recorded the impairment charge discussed in past calls in our SEC filings. The company's basis in condominiums represents less than 5% of gross asset value.
Negotiations continue on specific proposals to resolve the construction loan of the Buckhead condominium project. In the meantime, we're completing construction, furnishing the amenity spaces and opening an onsite sales office. We have a number of reservations with prospective buyers.
Finally, we're wrapping up the work on the exterior remediation program within the original budget. The company's line of credit capacity continues to be sufficient and coverage ratios are improving modestly. We've issued very little stock under the at the market equity program, mindful of the share price, cost to capital and use of proceeds.
We are comfortable with the condition of the balance sheet and with our ability to refinance debt as it matures and to fund committed investments. As we look over the remainder of this year and into next, we are optimistic about the state of our business.
That concludes our prepared remarks. Operator, please open the phones lines for Q&A.
Question-and-Answer Session
Operator
(Operator Instructions). Our first question comes from Michael Salinsky with RBC Capital Markets.
Michael Salinsky - RBC Capital Markets
Good morning, guys. Dave, I don't know if I caught this in the prepared remarks, but did you give the rates for new leases as well as renewals during the quarter. And also just if you could give us a sense of how this trended in July?
Jamie Teabo
Sorry, Michael, this is Jamie. I'll answer that question. Rents trended up from quarter one to quarter two on our new leases, so we saw a sequential growth for the first time in quite a while actually. We were averaging at $1.26 in quarter one that moved up to $1.29 on our new leases in quarter two. And we're seeing that trend up even higher in July at $1.35. So we are seeing continued improvement as we push through to the back half of the year.
Michael Salinsky - RBC Capital Markets
Okay, and the renewals you guys are pushing along what sort of increases?
Jamie Teabo
We are. Quarter two, we averaged a 2% renewal increase across the portfolio. What we're seeing so for average for quarter three, which is basically July finish. We still have a good bit of work to do for August and September, but we're at 3%. Currently on quarter three, we're seeing September up above that so far.
Michael Salinsky - RBC Capital Markets
Second question relates to the development. I think you mentioned no development starts until probably the first half or second half of next year at this point. Are there any properties you started capitalizing interest through as you're working through again, this quarter?
Dave Stockert
No, just Carlyle. We are not capping interest or property taxes, any of the other land positions nor are we capping overhead to any of those land development sites other than Carlyle.
Michael Salinsky - RBC Capital Markets
Third question, just as you're looking at your guidance, what kind of carry costs are you guys assuming relating to the condos at this point? Obviously you guys have some good pace. Just wondering if that provided any kind of benefit in the guidance at this point relative to the original expectations?
Chris Papa
Mike, I don't think we've changed our expectations much on the carry costs. Originally when we had forecasted condominiums, we thought that carry costs were going to slightly outpace the gains and just consequently we were forecasting a slight loss for the full year. We've actually had a little bit better result in our rise in Harbor conversions as we close them out. They added roughly about $0.02 of the variance there and the rest of it had to do with increased visibility on our profits on the four seasons project down in Austin.
Michael Salinsky - RBC Capital Markets
Okay, then just a final question. I'm assuming that, as you looking it right now you guys expect the resolution of the Atlanta construction loan debate here in the third quarter?
Dave Stockert
We are certainly working towards that. I'm not making any guarantees at the moment. That's what we're working toward.
Operator
Our next question comes from Eric Wolff with Citi.
Eric Wolff - Citi
Other than the DC development you are starting this quarter, I guess the rest of your land is primarily located at Atlanta, Texas and Florida. In those markets, how much do you think rents need to rise at this point for the yields on new development to make sense?
Dave Stockert
Well, a lot of those markets now, if you look at where rents are in the last four weeks compared to their all-time high rents, which is one good indicator in a lot of Atlanta now, that number is on average about 7%. You know, bigger gap in Charlotte. It's about 9% in Texas. Obviously there's no gap in D.C. In Florida it's about 8% as well, 8% to 9% as well. So, that will give you some sense of where things need to be.
Eric Wolff - Citi
So, I guess, in terms of thinking about which development you may potentially start in 2011, it's kind of looking more like maybe late 2011, early 2012 for some of these?
Dave Stockert
I don't know that it's that long. I would hope that there might be something in the first part of 2011. It may not be a big volume. If we see a trajectory of rents, we may look at these on a bit more of a trended basis than we looked at Carlyle. Carlyle was a luxury because we didn't have to. You know, it should, if rents do what we think they'll do in Washington, it should produce a lot better yield than we reported, but on the rest of them we may have to look at some trending and see how comfortable we are with it.
Eric Wolff - Citi
Got you. And even including your DC development, you still have about $300 million in capacity down your line. Should we expect you to keep this capacity open in case of acquisitions or development or do you anticipate using it to pay down your upcoming debt?
Chris Papa
We have over $400 million in capacity right now and the total of $430 million of our two lines. With the condo sales starting here, particularly four seasons, cash is starting to come in, so at least for the remainder of the year up until the point we have to refinance the 77 bonds that are coming due in December, I see no reason why we wouldn't continue to maintain that capacity.
Eric Wolff - Citi
It looks like some of your sun belt markets lagged a little bit on a sequential basis, specifically Atlanta and Tampa. How do you think the rent recovery will look here versus some of your stronger markets this quarter like D.C. and New York?
Jamie Teabo
In Tampa, we lagged a little sequentially on the revenue side which is fairly typical for that market. We do have a pretty high occupancy in the first quarter. Typically we have some corporate business that comes in annually that time of the year and then that falls out in the second quarter. That trend doesn't alarm us at all. We're actually seeing some pretty good rent growth numbers moving into third quarter for that particular market.
In Atlanta, we had sequential revenue growth, we were a little behind on the expense side and that was because we had some tax adjustments from prior-year settlements that hit the first quarter that affected us negatively in the second quarter.
Eric Wolff - Citi
Looking out to next year, would you expect those types of markets to kind of match the growth that D.C. and New York have seen or you just think the fact that D.C. is just so much more healthier economically in terms of jobs that it's going to continue to be able to push up rents in that market?
Dave Stockert
One market analyst, Ron Witten, one piece of information that we look at, but what Witten would say is that gap starts to close in terms of revenue, rent growth between say, Atlanta and D.C. in 2011 and then in 2012 just based on the dearth of supply in Atlanta, the rent growth starts to accelerate past D.C. Now whether that's truly comes to pass, we'll see. That's one person's opinion.
Operator
(Operator Instructions). Our next question comes from Michelle Ko with Bank of America.
Michelle Ko - Bank of America
I was just wondering when do you start to expect significant supply to come on in your markets?
Dave Stockert
It's going to be a while because nothing really significant has been announced to start. I think obviously you'll see supply come on in D.C. On the one hand, there's been more announcements and starts in the market like that. On the other hand, much of what is being announced is like post Carlyle, takes a long time to build.
It's a 27-month construction period. So it will slow that down, but we really haven't seen a great deal of starts in the other market, and even if it's a wood-framed deal, you're talking about 15 months to new units. So assuming some things start in 2011, you'll see some modest uptick in supply in 2012 and then 2013, but I think for the next couple of years you won't have much of anything because as nothing got started to speak of in 2010.
Michelle Ko - Bank of America
I was just wondering if you could talk a little bit about the acquisition market what you're seeing out there in terms of cap rates in your markets?
Dave Stockert
It's very aggressive, it continues to be, very aggressive we've underwritten some transactions, but haven't really been close in terms of valuation, but I would say for assets that are of comparable quality in most of our markets it would be below six, somewhere in the mid to high 5s for the Dallas' and Atlantas' of the world. And then obviously in D.C, it's below five.
Operator
Our next question comes from Andrew McCulloch with Green Street Advisors.
Andrew McCulloch - Green Street Advisors
Can you give any additional color on the Four Season unit sales as far as the breakdown of what floor plans have sold and associated pricing. It looks like you may have closed some larger units this quarter?
Dave Stockert
W closed some large units as part of the first trend of closing, certainly we had eight closings in June. The closings that we've had beyond that to get to the 23. It's 23 units, the total retail price of those is $29.6 million and that's about 48,000 square feet. So it's right at $6.20 a foot and average unit size are 2,000 square feet.
Andrew McCulloch - Green Street Advisors
Then again on the Four Seasons as far as units under contract, how many of those were under contract last quarter, I guess my question really centers around how many people are falling out of contract?
Dave Stockert
Last quarter we had 76 under contract and now we've got basically between closings and under contract we've got 77, but having said that, it's our expectation that we'll have fallout and if you look at the pre-sale fallout from when we did the condo project up in Washington, D.C., at Carlyle, there is about 30% rate of the original contracts. So it wouldn't surprise us if something like that number occurs.
Andrew McCulloch - Green Street Advisors
And now that you are starting to close units, have you changed your expectations what the selloff period will be?
Dave Stockert
In terms of assessing the impairments, we actually lengthened it by about six months, so right now we're using 54 months, so four and half years, beyond this first crunch closes.
Operator
Our next question comes from [Steve White] with Cowen and Company.
Unidentified Analyst
Hi, could you walk us through sort of on a per share basis the components of the change in guidance. I'm getting about $0.23 midpoint to midpoint. And based on my estimates may be $0.08 to $0.10 is from a same-store NOI and additional $0.06 from the condo. So I'm still missing a little bit. I don't know if it's just sort of the beat this quarter or if you could clarify, that would be great.
Dave Stockert
Sure. Well, Steve, on the same-store you're going from a midpoint of a negative 7.8% to a negative 4% on the midpoint. That's roughly equates to about $0.11 a share. That coupled with newly stabilized pool and our lease up pool, for those three pools in total you're probably looking at about $0.13 and the $0.23. About $0.06 is related to condos and then you got about another $0.03 related to interest, which is predominantly interest cap increase over the original guidance driving that, offset by some other capital items going the other way, but yeah, that essentially makes up for the bulk of that $0.23 change.
Unidentified Analyst
Okay. So there will be additional capitalized interest above and beyond the initial guidance, is that correct?
Dave Stockert
When we started Carlyle, that was not in our original guidance.
Unidentified Analyst
Okay.
Dave Stockert
And then there has some slower delivery of units on the condo projects because there's a little more cap interest on those projects that we had originally forecasted.
Unidentified Analyst
Okay. And the gain from the condos, is that simply a function of having kind of written down the basis at this point and now?
Chris Papa
Well, during the quarter we recognized a little under $200,000 of profit. So when you look at the gains on the eight units on an adjusted cost basis on the Four Seasons, again the carry costs have largely offset any gain there. The way we're essentially accounting for gain and what we've done in the past is essentially allocated costs on a relative sales value approach and we're doing the same thing here, so that will essentially track our model in roughly the same model that we're using for valuation purposes.
Unidentified Analyst
Okay. And the capitalized development expenditures are running substantially below where they have been historically, which is understandable, but I'm just wondering if you would expect that to pick up here? I know, you don't really anticipate starting any additional projects this year, but how do you think about that?
Dave Stockert
Well, yeah, there will be a little bit, obviously there will be some development overhead capitalized to the Carlyle project. That will offset some of the runoff of overhead capitalization on other projects that are done. And then to the extent that we start additional projects next year, then that would add to that.
Operator
Our final question comes from Karin Ford with KeyBanc.
Karin Ford - KeyBanc
Hi, good morning. First question, just relates to trends post-quarter. I know, you said that rent growth seems to be up in July, August. Did you see any change in traffic or any pushback from renters or any change in turnover post-quarter as you started pushing rents harder?
Jamie Teabo
Not yet, Karin. So far in July, the trends are caring through from the second quarter. Our traffic is up over prior year, which it has been running consistently up, and that same trend is true in July, and our leasing volume is a little bit lower than prior year, but it's been running a little bit lower than prior year, all through second quarter and July and frankly really a function, we have a lot less exposure this year than we did last year, around an 8% exposure level. We were around 10-2 this time, last year. So we have considerably less to lease. So we're fine with running in about 1.3% net lease percentage versus last year at 1.4%.
Karin Ford - KeyBanc
Great, thanks. Final question just relates to any one-time items in the quarter. It looked like other revenue was a little higher than normal and other expense was a little lower. It looked like there might have been a $200,000 insurance recovery in the quarter, was there anything else?
Dave Stockert
As far as the insurance recovery, I don't recall any. I mean, are you referring to the insurance recovery we had last year on the hurricane?
Karin Ford - KeyBanc
Okay, that was last year. Okay. So were there any one-time items in any of those line items?
Chris Papa
I don't think anything significant. The only significant one-time items we had during the 2010 quarter were essentially the Four Seasons charge and the $400,000 charge we took on the land parcel in Tampa.
Operator
We will take a follow-up question from Michelle Ko.
Michelle Ko - Bank of America
Hi, just one more question. I was just wondering in terms of the guidance, if we look at how you performed in the first half excluding the charges, the FFO is up, it was $0.68 and if we double that then we get to about $1.36, then the guidance is slightly under that. So I was just wondering if you could tell us where you might be a little bit more apprehensive in the second half, do you think that the same-store NOI growth is slowing from the first half.
Chris Papa
Well, there's two things Michelle. We disclosed in the press release itself. We tried to give some guidance on what's happening with interest cap. Did you see that coming down from first half to second half by about $3 million, that's about $0.06 of the impact right there? And if you look at the midpoint of our same-store NOI, we do see expenses going up somewhat from a timing standpoint in the second half of the year, largely in the third quarter. So that's going to actually have a sequential downward effect on same-store NOI to the tune of about $0.01 a share at the midpoint.
Dave Stockert
And then that's related to the timing of when we're painting properties.
Michelle Ko - Bank of America
Okay, great. So is that more seasonality, I guess?
Dave Stockert
On the expenses?
Michelle Ko - Bank of America
Right.
Dave Stockert
Well, not really. But, yes, we do paint properties in the good weather, so to that extent it's seasonal.
Operator
At this time we have no further questions in queue. I'll turn the call back over to our speakers for any additional or closing remarks.
Dave Stockert
Well, thank you all for joining us and we look forward to speaking with you in another three months. Take care.
Operator
With that we will conclude today's conference. Thank you for your participation. You may now disconnect.
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