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Post Properties (NYSE:PPS)

Q2 2014 Earnings Call

August 01, 2014 10:00 am ET

Executives

David P. Stockert - Chief Executive Officer, President and Director

Christopher J. Papa - Chief Financial Officer and Executive Vice President

Sheila James Teabo - Executive Vice President of Property Management

Analysts

Nicholas Joseph - Citigroup Inc, Research Division

Jana Galan - BofA Merrill Lynch, Research Division

David Toti - Cantor Fitzgerald & Co., Research Division

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Buck Horne - Raymond James & Associates, Inc., Research Division

David Bragg - Green Street Advisors, Inc., Research Division

Operator

Good day, everyone, and welcome to the Post Properties Second Quarter Earnings Conference Call. This call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Dave Stockert, President and Chief Executive Officer, for opening remarks and introductions. Please go ahead, sir.

David P. Stockert

Thank you. Good morning. This is Dave Stockert. With me are Chris Papa, our CFO; and Jamie Teabo, Head of Property Management. Welcome to the Post Properties second quarter earnings 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 2013 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 with some brief remarks.

In the second quarter, we produced growth in per share Core FFO, the 4 charges for the early extinguishment of debt of 6.5%. More importantly, we grew per share Core AFFO by more than 14%. This solid result is the product of top line revenue growth of just under 6.5%, and we'll focus on translating those revenues in cash to the bottom line.

Demand for apartments remain strong. Better job growth and a still weak first-time homebuyer market support favorable conditions even in the face of new supply. Notably, rent growth for our communities on new leases in the second quarter of 2014 exceeded that of the year-ago period. And our portfolios in every one of our markets, including Washington, D.C., produced positive sequential revenue in rent growth. In addition to solid rent growth, we were also able to increase average occupancy compared to this time a year ago, and this sets the portfolio up well for the second half of the year.

Looking beyond quarter end, rent growth on new leases averaged 3.4% for July, and growth on renewals signed so far for July, August and September is averaging 4.9%. Again, these levels of new and renewal rent increases are outpacing what we were achieving this time a year ago. 9 of the 10 largest multifamily REITs have reported results so far this earnings season. Our sequential revenue growth for the second quarter ranks third highest out of those 9.

At our projects and lease-up, leasing volumes and rent levels are also robust. We're moving up the expected stabilization dates for lease-up communities in Tampa and Houston. Given the pace of leasing, the development pipelines stands to contribute meaningfully to growth for the rest of this year and into next. Property operating expenses and capital expenditures are tracking to our budgets and combined with stronger revenues, contributes to our increasing our expected range for per share AFFO for all of 2014.

On the capital front, in May, we closed the first of the 3 assets we've been marketing for sale and used the proceeds plus cash on hand to retire secured mortgage debt. This enhanced our balance sheet and forward investment capacity without diluting run rate cash flow.

Our 2 New York assets are presently under contract to sell at a price of $270 million, and that closing is currently expected later in the third quarter. All told, it now appears that gross prices from asset sales will top $340 million, much more than we initially expected and reflecting ongoing strong demand for our assets.

At closing of the New York property sale, we plan to use net proceeds after-deal costs to pay off the mortgages on those assets along with related prepayment penalties. And then, we'd still expect to retain roughly $140 million of cash from that sale that could be used in the future for development funding share repurchases, special dividends or other investing activity. Also, upon completion of these asset sales, we would expect to have one of the very strongest balance sheets in our sector with significant flexibility and capacity going forward.

As to our investment appetite, even with the stronger stock price today, we have a bias toward internally funded development on land we already own as a primary source of value creation. Our Post Galleria project in Houston will be a high-quality addition to our Houston portfolio at a cost base with a yield that is attractive, relative to the cap rate on our dispositions and relative to what the asset can be worth at completion of stabilization. We are pursuing a disciplined approach to growth in the current environment with a focus on those activities that drive cash flow and value creation and with an eye on overall risk and on the balance sheet.

To wrap up, we continue to operate in a favorable environment and are well positioned to take advantage of the most profitable and value-enhancing opportunities. Our size makes each opportunity more impactful. Our capital posture today is one of staying ahead of the curve as the cycle matures. And our people are doing a terrific job. As always, we appreciate their hard work and commitment.

With that, that concludes our prepared remarks. Operator, please open the phone lines to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Nick Joseph with Citigroup.

Nicholas Joseph - Citigroup Inc, Research Division

Can you give us a walk through on the change to core FFO growth, excluding the debt extinguishment cost, maybe how much is from better expected same-store results, better development lease-up, the disposition timing and pricing, et cetera?

Christopher J. Papa

Most of it has to do with operations. We did make some adjustments to compensate for the sales. But overall, that's not driving significant change since we're using a good portion of the proceeds to pay down debt. But most of it comes from property operations.

David P. Stockert

That's both same store and lease-ups, and the lease-ups, principally.

Nicholas Joseph - Citigroup Inc, Research Division

Okay. And then you mentioned strong demand for assets. You've a small footprint in a handful of markets like Houston, Austin and Orlando. Could you see yourselves exiting in any of those similar to what you did in New York, redeploying that capital into larger markets?

David P. Stockert

No, I mean -- well, I mean Houston is a small -- take that as an example. That's a small market, small footprint rather for us, but a huge market for us. And so, we would certainly want to grow that market. Orlando is a market that we like. It's consistent with the rest of our portfolio. So beyond New York, the markets that we're in, we like. And we'd actually like to grow some of the smaller markets a bit. And that may come with a concurrent sale of some assets and some other markets where we're more significantly represented.

Nicholas Joseph - Citigroup Inc, Research Division

And finally, can you talk about the development yield on the Houston asset relative to transaction cap rate in that market today?

David P. Stockert

That asset is in the development yield, obviously, as what we stated. We try to put the yield in based on where we think rents are today. And we believe that there is probably 100 basis points spread over acquisition pricing in that market, about 20%, 25% value creation, and we feel comfortable with our cost basis in that asset and just over $200,000 a door relative to what you would pay for similar lease-situated assets.

Operator

We'll take our next question from Jana Galan with Bank of America.

Jana Galan - BofA Merrill Lynch, Research Division

I was just curious if you are surprised by the strength in occupancy and the lower turnover and was the lower turnover kind of portfolio wide or are there specific markets where it was a little bit better?

Sheila James Teabo

Hi Jana, this is Jamie. We have been running below on the turnover, and our disposal levels have been running down really all year, year-over-year. So we really more surprised to see that trending through the second quarter. All of our markets are in better shape on turnover year-over-year with the exception of Austin. That's the only market where we're seeing turnover up this year versus last year.

Jana Galan - BofA Merrill Lynch, Research Division

And if you can maybe just comment on the supply outlook, particularly, Atlanta?

Sheila James Teabo

Sure. We're still in decent shape here in Atlanta. We're still seeing great trends on renewals and new leases in occupancy in this market. We do have supply coming. It's expected to be about what it is for '14 and '15, just under 10,000 units is what we're showing on our reports for completion since '15, which is very equivalent to what was expected in '14. So as the percent of units is tracking the same. I think we'll see a little bit of softening in the rent growth next year as the deliveries hit. But right now, we've got great traction on occupancy and the rent growth.

Operator

We'll take our next question from David Toti with Cantor Fitzgerald.

David Toti - Cantor Fitzgerald & Co., Research Division

Hey Dave, I just want to go back to that first question on the core performance. And maybe my memory is off, but I seem to remember that there was some tapering last year, some deceleration, and it seems that we're picking up again in the portfolio. Is that just a technical dynamic given maybe a slightly easier comps now? Or are you seeing kind of a resurgence in markets that may have been weaker last year?

David P. Stockert

I think things a little stronger, David, than, certainly, than I expected. I won't speak for Jamie, but things are a little better. And some of that I think is the fact that the job creation numbers are bigger this year, generally, than they were last year. And I think the other thing is -- one other thing that I might point to is this stubborn issue in first-time home buying and how younger people are not making that step the way they might have. And I think that's helping us as well. So yes, I'd say in a number of markets we're pleasantly surprised at the strength of the demand given the fact that, obviously, we're seeing more supply.

David Toti - Cantor Fitzgerald & Co., Research Division

First-time dynamic. My only other question has to do with taxes, and does that continues to weigh on operating expenses? Can you give us just a little bit an outlook for the remainder of the year, maybe your expectations going forward?

Sheila James Teabo

David, we received all of our values at this point. We are still waiting on rates for Georgia, Florida and Texas and North Carolina. We do have almost half of the same-store portfolio out on appeal based on the noticed values that we have gotten in. As we've talked in the past, the timing of settling those deals could be quite lengthy. But as noted, we did not increase our expense guidance. So based on what we received so far, we feel we've got the values covered and maybe a little bit of play in there for any moment the rates come in.

Operator

Our next question will be from Alexander Goldfarb with Sandler O'Neill.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

A few questions here. First, on the CapEx, obviously, painting drove your expensed operating budget. But then on the flip side, CapEx for the year-to-date is definitely down from where it was a year ago. So what should we expect for the balance of the year? And then, while you're not giving '15 FFO guidance, what should we think about the interaction of those 2 lines as we think about 2015?

David P. Stockert

Well, I think that for the year, you will see -- we talked about the difference between how we account for exterior paint for example. So you'll see in this elevated expense line item in operating expenses, and for the year, you'll see CapEx running below last year. And then going forward, hopefully, it's more normalized, I'd say. We're establishing a more normalized level for both of those line items. But we're not at all ready to start talking about our budgets for next year.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

But as far as thinking about 2015, we should see CapEx come back up and the operating expense come back down. So something more normal?

David P. Stockert

No. I think what I'm saying is, you'll see us settle out at an absolute operating expense kind of level. And you'll see us settle out this year in the CapEx level. And I would say, those things, plus or minus, will kind of project into next year.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Okay, okay. And then, the next question is just on the disposition. You spoke about $140 million net of cash, but on the last call, you spoke about I think about $30 million of stock buybacks. Obviously, there are taxes that you guys may owe depending on how you end up structuring everything at the end. So what's really the net effect of the cash that's really for corporate purposes versus cash that may be used for either stock buybacks, special dividend, payment of tax, et cetera?

David P. Stockert

The short answer is -- Chris can talk about it more -- but we don't know at this point in terms of the level of special dividends and things like that. Well, that is a process we'll work through for the next number of months. But I consider all that cash to be useful in a variety of ways, whether it's funding development, whether it's paying special dividends to shareholders or whether it's buying back stock. And we'll just see how it plays out. But it's $140 million of powder, if you will, none of which I think is going to be used in ways that aren't beneficial to shareholders. I mean, I don't see us paying taxes to any great degree. I think we're either paying special dividends or retaining the cash flow for use in other ways.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Well, I guess, with tax, I meant like New York transfer and that sort of...

Christopher J. Papa

Alex, the transfer taxes in those type of costs are netted out of the $140 million that Dave mentioned.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then, the stock buyback. Have you committed to that or because the price came in ahead of where you thought you may not need to do as much in the stock buyback front?

David P. Stockert

Well, I think that what -- well, yes, the pricing is better than we thought. What we said about the stock buyback is, we wanted to make kind of a cash flow neutrality to the asset sales, so that we would end up having realized good prices, having strengthened our balance sheet and at the same time, not creating dilution. And we talked about plus or minus $30 million stock buybacks being the number that kind of made those things come into balance. I would say that the pricing is better, which takes some pressure off that. The stock price is performing differently today, notwithstanding yesterday. So we'll see how it goes. But we certainly have the capacity to do it. I think I'm more inclined to wait for the inevitable dips in the market to execute. But we've certainly got the powder to do it.

Operator

We'll take our next question from Nick Yulico with UBS. There is no response. We will next go to Buck Horne with Raymond James. [Operator Instructions]

Buck Horne - Raymond James & Associates, Inc., Research Division

I'm wondering, is there any properties that you have in the portfolio where you actually having the lower new lease rates? I'm just wondering where are the pockets of supply pressure most acute against your portfolio right now?

Sheila James Teabo

It's D.C. still top. I mean, even though we had pretty decent sequential growth quarter 1 to quarter 2, there are still pockets in that market that are tough. And one week, we'll see a little bit more strength on the new lease trends, and 2 weeks later, we might see a dip south again. So that's still not a consistent positive in the D.C. market on the new lease fronts. We still have, really, decent traction on the renewals in the low 3%, which is where we've been tracking there. But new lease rents are a little volatile in that market. Orlando is a function as we discussed before of one of our stabilized assets, one of the 2 we have in that market competing with the lease-up. We finished the lease-up now. We've stabilized that asset, so we should see a little more traction on the new lease front growth there, but that has given us a little bit of trouble as we finalize lease-up. We've seen those rents dip a little bit. But we have better traction going forward there.

Buck Horne - Raymond James & Associates, Inc., Research Division

And Uptown Dallas is that holding up okay or is this like...

Sheila James Teabo

We're actually -- we actually are seeing -- we're in great shape on the exposure on occupancy in Uptown Dallas today, so we're seeing a little more pricing power on the new lease front growth than we have in the past quarter.

Buck Horne - Raymond James & Associates, Inc., Research Division

Great. And going back to the resident turnover being down so much. I'm just wondering, which category of the reasons for move out seems to be declining the most? I mean, is it the move outs to buy or is it the move outs to rent increases? Or what's going on within the resident turnover trend?

Sheila James Teabo

Yes. Well, actually the job relocation-- at our top 3 are typically house price and job relocation. We're seeing house move outs for home purchases tracking pretty much where it's been in the 15% range for the last year. Apartment price ticked down just a little bit to 9% this quarter. So we haven't really seen that move. This last quarter is down a little bit from '13. But it's really the movement for job transfer. We saw a lot of people relocating to get a better job or keep it, get a job if they've lost one, and we just haven't seen as much movement with that this year.

Buck Horne - Raymond James & Associates, Inc., Research Division

My last if I throw in there. Are you actively looking for any land parcels right now for future development? Are you going to get more active in the land market with your extra cash? And is the pricing on any of that land make sense or can you make it pencil at these prices?

David P. Stockert

Never say never, but we're really not focused on land at the moment because the challenge that we have, and it plays out, for example, in our project in Houston is construction cost at the moment are darn near impossible to predict. And so, getting the pipeline into the production that we have is challenging enough. But I'd say with the -- until we see some stability in construction pricing, it's really hard to underwrite land acquisitions, which are also elevated. Now that makes development more difficult, but on the other hand, it makes it more difficult for our competitors. So it's good and bad.

Operator

Next, we'll go to Dave Bragg with Green Street Advisors.

David Bragg - Green Street Advisors, Inc., Research Division

Dave, how does that the fact that the stock is behaving differently as you noted, affect your broader thinking on external growth opportunities?

David P. Stockert

Well, as I said in my prepared remarks, it doesn't make me want to run out and issue stock on the ATM. Because I think acquisition pricing, land pricing, construction cost, I mean, it's all pretty difficult. And so, we've got our game plan. We've talked about it. And we're at the moment, principally, focused on executing our development pipeline, trying to get land that we have on our balance sheet into production. That's the main thing. And then, we'll look at other things opportunistically and see. But obviously, I'm happy for us and happy for shareholders with stock prices a lot better. But we're still looking at the entire picture of asset pricing, development cost, et cetera.

David Bragg - Green Street Advisors, Inc., Research Division

So although, the cost of capital is meaningfully improved over the last 6 to 12 months, the investment opportunities that you see are incrementally more challenging?

David P. Stockert

I think that's accurate.

Operator

It appears there are no further questions at this time. Mr. Stockert, I'd like to return the conference back to you for any additional remarks.

David P. Stockert

I appreciate you all's time and attention, and we'll talk again in a quarter. And have a great weekend.

Operator

This concludes today's conference. Thank you for your participation.

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