Post Properties' (PPS) CEO Dave Stockert on Q2 2016 Results - Earnings Call Transcript

| About: Post Properties (PPS)

Post Properties Inc. (NYSE:PPS)

Q2 2016 Earnings Conference Call

August 1, 2016 10:00 ET

Executives

Dave Stockert - President and Chief Executive Officer

Jamie Teabo - Head, Property Management

Art Quirk - Chief Accounting Officer

Analysts

Nick Joseph - Citi

Austin Wurschmidt - KeyBanc Capital Markets

John Pawlowski - Green Street Advisors

Rob Stevenson - Janney

Ivy Zelman - Zelman & Associates

Operator

Good day, everyone and welcome to the Post Properties Second Quarter 2016 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Dave Stockert, President and CEO for opening remarks and introduction. Please go ahead, sir.

Dave Stockert

Thank you, Greg. Good morning. This is Dave Stockert. With me are Jamie Teabo, Head of Property Management and Art Quirk, our Chief Accounting Officer. 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 2015 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 will now begin the business of this call. Earnings growth in the second quarter was again strong, up double-digits for per share funds from operations and ahead of our internal expectations. We raised same-store revenue guidance reflecting a higher rate of growth for 2016 than in the prior year and raised the midpoint of our earnings guidance to reflect the better than budgeted contribution of virtually all parts of our business. The economic demographic and housing market conditions remain conducive to growth. We recently launched the sale of three assets in Atlanta currently owned in a joint venture, in which our interest is 25%. That joint venture was formed in 2007 and had an expected life of 10 years. So now was an opportune time to harvest value.

We are seeing very good activities so far by prospective bidders. These 18-year-old to 20-year-old assets fit a value add strategy where acquisition capital is still abundant. We are optimistic that we can close the transaction in the fourth quarter at a pricing that we will evidence ongoing support for our internal view of net asset value. We kicked off leasing in the second quarter of our newest development project in Raleigh. That community is seeing some really good early leasing volume that ramps ahead of pro forma.

Our search for new CFO is progressing, having met with a number of interested and talented candidates. We have narrowed the field and expect to be able to attract a quality new CFO to join the ranks of our experienced management team. In the meantime our – and our professional in financing, accounting and finance accounting tax, IT and HR have all stepped up and are doing a terrific job. Finally, you will note our new logo with its modern tool of design it’s updated and more conducive to mobile platforms that are increasingly important to our marketing. Centerpiece of our branding refresh will be an overhauled website which we expect to launch in the fourth quarter. It will substantially improve the online prospect experience, be mobile enabled and will enhance our marketing.

Overall, I am very pleased with our results this quarter and with how we continue to position the business. I will now turn it over to Jamie to talk more about operating results.

Jamie Teabo

Thanks Dave. The same-store portfolio continues to perform ahead of our internal budgets on a combination of solid rent growth and occupancy. Most of our nine same-store markets have better year-over-year revenue growth in the second quarter this year than they did in the second quarter a year ago and sequential growth in the average rental rate is also better in this year’s second quarter than it was last year. We continue to see our strongest growth in Tampa and Orlando, Atlanta, Raleigh and Dallas. Charlotte is solid. Austin and the D.C. Metro continue to firm and our only meaningful challenge is Houston, where we have one same-store asset and derived a fairly small percentage of our NOI. We are moving through the summer leasing season in good shape. So far in the third quarter new lease growth has increased to 2% and renewal increases are averaging 4.5%.

Although turnover ticked up modestly for the six months period in 2016, we continue to see fairly moderate move outs to buy of 19% and move outs due to price were at 10% in the second quarter, down nearly 2 percentage points over the prior year. Rent to household income from new leases executed in the second quarter stood at 18.6%. Our lease-up at Post Alexander is nearly completed with about 20 leases to go and should achieve 95% leased by the end of August at average rents ahead of pro forma. And at Phase 2 of our Parkside at Wade community in Raleigh, we have started the leasing in the second quarter and have already had 101 leases or roughly 34 per month also at average rents ahead of performance that are still Phase 2 is so far not impacting Phase 1. That first phase had average economic occupancy in the second quarter of nearly 97% and had year-over-year revenue growth of more than 10%.

Turning to expenses we are now tracking under our budget for the year, this is the driver behind our reduced same-store expense guidance. Same-store expense comparisons get easier in the back half of the year which offsets more difficult revenue comparisons. Net-net, our first half actual NOI growth and full year estimated NOI guidance are roughly the same. In sum, we continue to see steady overall performance from the portfolio.

I will now turn it over to Art to talk more about our results in the quarter and our guidance for the year.

Art Quirk

Thanks Jamie. I will start by pointing out that funds from operations in the second quarter is positively impacted by about $0.005 related to the reversal of long-term compensation accruals for stock and options awards forfeited by our former CFO, this accounts a portion of the reduction in G&A year-over-year. We have raised guidance for full year FFO per share reported on basis consistent with the NAREIT definition to reflect strong results through the six months and our expectations for the rest of the year. Our guidance includes our share roughly $0.02 of the costs we expect to incur to prepay the mortgage loans on the three Atlanta JV properties currently in the market for sale. We are currently budgeting a sale of those assets some time in the fourth quarter. Beyond the amounts earmarked to payoff the debt on those assets, we are currently forecasting $20 million to $25 million in net proceeds for our 25% interest. These proceeds should be used to pay down our line balances. We currently believe we have strategies we can employ to manage the tax gains from these sales without the need for a special dividend.

With that, we will conclude our prepared remarks. Operator, please open the phone lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And first from Citi, we will hear from Nick Joseph.

Nick Joseph

Thanks. I am wondering if you can talk about the share repurchase program and the decision not to repurchase any shares in the second quarter, there is certainly volatility in the stock maybe yet to do with blackout periods or anything else going on at the time, but any comments you can give around that?

Dave Stockert

Nick, we have – as you know we setup earmark $100 million for share repurchases, we have done about $65 million, we have about $35 million left. We have tried very hard to be opportunistic and really hit down tracks in the market and done a good job of that like the price that we have achieved at $55. And I would say that REIT stocks have generally performed pretty well in the quarter and we will hold out then be disciplined about when we go ahead and execute that.

Nick Joseph

Can you remind us of kind of the targets in terms of maybe a discount to your internal NAV of when it is attractive to execute on that program?

Dave Stockert

Well, at the price that we have achieved, we think it’s upwards of 20% odd.

Nick Joseph

Thanks. And then just in terms of looking ahead to 2017 and supply, which markets you are expected to compete with more supply next year than we did this year and which markets are more favorable next year versus this year?

Jamie Teabo

Nick, this is Jamie. On the favorable side, we see starts coming down in Houston and Raleigh and the other markets really Atlanta will see a bit more supply coming online in ‘17 than we are in ‘16, but it’s really, really high end, high-rise apartment communities with high rent. So, we have obviously had our own high-rise and lease-up that post-Alexander in the Buckhead area, we will have enough coming online end of next year in the Midtown area and those rents are considerably higher than our same-store portfolio in Atlanta.

Nick Joseph

Thanks.

Jamie Teabo

Sure.

Operator

And our next question comes from Jordan Sadler with KeyBanc Capital Markets.

Dave Stockert

Hi, Jordan.

Austin Wurschmidt

Hi, good morning. It’s Austin Wurschmidt actually here with Jordan. I am just curious about your thoughts on additional asset sales, is it something that you are considering as you start to think about capital needs and potential new development starts in the next call it 12 to 18 months?

Dave Stockert

Well, we always consider asset sales. They are on the menu. Today, we are very focused on selling these assets in this joint venture that we have. We think so far they are being well received. As we look out and we have talked about it on calls in the past, as it relates to our current development pipeline, we can fully fund that off the balance sheet and not take our leverage up to more than about 35% even with another $35 million of share repurchases and that’s a very comfortable level for us on the balance sheet. So, beyond that, to the extent we start new development projects, we will start to look at potential asset sales down track, but nothing imminent.

Austin Wurschmidt

So, when you start to think into 2017 some of these projects that are currently under construction will be completed. I mean, how are you thinking about the size of the pipeline moving forward?

Dave Stockert

Well, I think we have said before we continue to go out and selectively look for new land positions, but we also think that as we continue to move through the latter part of the cycle that the pipeline will naturally shrink some. We won’t add properties or new developments in all likelihood as quickly as some of these communities will come off.

Austin Wurschmidt

Great, thanks for the detail, Jamie.

Dave Stockert

But we are not going to – we are not intending to go to zero. That’s we are not intending to go to zero.

Austin Wurschmidt

Great. Thanks, Dave. And then Jamie just quick one, appreciate the operating update but could you just give us where occupancy was through July?

Jamie Teabo

Sure. We closed out July at 96.7% on July 31. So, we are up a good bit from where we were at the end of June.

Austin Wurschmidt

Great. Thanks for taking the questions.

Jamie Teabo

Sure.

Operator

Moving on, from Green Street Advisors, we will hear from John Pawlowski.

John Pawlowski

Thanks.

Dave Stockert

Hi John.

John Pawlowski

Hi Dave. Would you mind Dave, walking us through how you would view the relative attractiveness of capital uses today at current pricing and how you would rank development starts versus share repurchases, acquisitions and debt retirement?

Dave Stockert

Well, we haven’t really been much of an acquirer, we are a developer by pedigree and we believe we create value in that process. So, that one is fairly easy. We would rank development ahead of acquisitions. Doing a moderate rate of development doesn’t – is something that we would intend to continue to focus on. But I think you have seen by our mix over the last few years we also engaged in asset sales. We engaged in share repurchases and debt reduction. We have done a lot of debt reduction and so we look at the prospective opportunities in each of those and we will select from that mix across the board as conditions warrant.

John Pawlowski

Okay. And then in terms of the joint venture, could you provide a little context obviously a 10-year agreement could have been – could it have been extended, who was driving the decision to sell now and what’s your appetite today to do more JVs?

Dave Stockert

We came to that decision neutrally with our venture partner. And it was in a fund that was – had that kind of life. So, it certainly could have been in fixed end, but it wasn’t likely to be, because the fund was winding down. But that was something that we both have evaluated it actually for the last many months and talked about timing and there is debt on these assets. There is prepayment penalties. We were looking at the right combination of what we thought market conditions and prepayment penalties total returns, IRRs, etcetera. So that’s been a conversation with our partner. As to the appetite for joint ventures, I think joint ventures can have a place and we have used them successfully and been happy about the joint venture relationships that we have. But we also understand that simplicity tends to be rewarded in the marketplace and so it goes back to I guess the early question about capital allocation and opportunities. Today, we don’t really see a need for more joint ventures, but we don’t rule it out down the road.

John Pawlowski

Okay. Thank you.

Operator

Next we have Rob Stevenson from Janney.

Rob Stevenson

Good morning guys. Dave, just a couple of questions, is there a promote on the JV sale?

Dave Stockert

There is not. These were 2007 vintage acquisitions under those JVs. So they were – it was created at, if you will, the last peak in the market.

Rob Stevenson

And then Jamie what – I know that you mentioned basically most of your markets are up, but in terms of markets driving the higher same-store revenue growth and then also markets driving the lower defense growth, are there one or two markets that stick out in terms of the main drivers of both expenses and revenue?

Jamie Teabo

Sure. I will start on the expense side first. The outliers on the high end are all due to extent pay and tax year-over-year, so Dallas, Houston, Austin, Tampa and Charlotte, all had significant year-over-year expense increases and those were all either due to tax or pain or a combination of those in those markets. On the revenue side, Raleigh is just surprised us. We expected to see frankly some downside in the Phase 1 asset with the start of the lease-up in Phase 2, but it’s done really well, had very strong occupancy and we have got great leasing demand in both phases. Again, it’s just the one asset that’s in this numbers. The other Orlando and Tampa have continued to sort of outperform our original budgeted expectations so far in the first half of 2016. We did see Orlando slow a little bit in the second quarter which is a fairly typical seasonal pattern for us there. Second and thirds usually a little bit slower growth and then picks back up in the fourth quarter. And then we also had a heavy turn schedule on our asset payment at the same-store pool, Lake at Baldwin Park, Phase 3 in the second quarter just based on when the construction deliveries hit in the original lease-up. So, we were a little more tentative on the renewal side knowing we had a pretty good bit of exposure potential, but they had a really strong second quarter given that fact. And Atlanta and Dallas continue to meet our expectations a little down from prior year, but still really strong on the occupancy side and I am hanging in there and performing as we expected for 2016 thus far.

Rob Stevenson

And then when you are looking for the second half of the year, I mean, the same-store revenue guidance got bumped, basically at the midpoint by 15 basis points from like 3%, 3.15%, I mean what markets was driving that? I mean, Raleigh doesn’t seem big enough to be driving the back half or the full year of 2016 same-store revenue bump that you got?

Jamie Teabo

Yes, exactly. I mean, obviously we do expect Raleigh to outperform our expectations for the back half of the year, but it’s just the one asset. We actually see – we had expected the supply in Charlotte to really temper the rent growth and that market this year and it’s actually performed better than our expectations, although it’s not one of our top performers that’s performing above our internal expectations on the budget and we predict that to carry on into the back half of the year. We actually see Austin performing better than anticipated. So, their budgets are tempered in the back half of the year so to speak. So, we think they will outperform and we think we will see continued strength in Tampa and Orlando in the back half of the year.

Rob Stevenson

Okay. And then any signs of letup as we go into ‘17 on property taxes in your markets?

Jamie Teabo

Well, since we are still aiding on rates for ‘16, so, we don’t want to have the full picture baked in for ‘16 at this point, but we are seeing values coming in a little better than expectations for this year. So, we anticipate hopefully we will get with our consultants as we work through the budgeting process later in the year, but hopefully we will continue to see a little bit year-over-year increase than we have been seeing the last 2 years.

Rob Stevenson

Okay. Thanks, guys.

Jamie Teabo

Thank you.

Dave Stockert

Thanks, Rob.

Operator

[Operator Instructions] Next we have Ivy Zelman with Zelman & Associates.

Ivy Zelman

Good morning and hanks for taking my questions guys. With respect to just the strength that you are seeing in some markets with renewal growth and new move-in, maybe you could talk if differentiating between where you are seeing strength and where there might be an increase in concessions and maybe concessions overall?

Jamie Teabo

Sure. We are seeing concessions really on the lease ups that we are competing with, is where the concessions are in the market. For us, it’s pretty much just where the pricing model takes the rent due to the net effective on the lease up competition, but we are seeing concessions on the lease ups in Atlanta, which we have been seeing and Houston particularly, those would the two markets, where we are seeing more session activity.

Ivy Zelman

Jamie, can you just elaborate when you say concessions like is it one month free, what $1,000 upfront, what are some of the specifics if you could?

Jamie Teabo

Yes, in Atlanta, it’s 1 month upfront and in Houston, it’s anywhere from 6 to 8 weeks upfront.

Ivy Zelman

And has that been consistent or pretty much incremental moving higher?

Jamie Teabo

That has been consistent with what we have experienced in the first half of the year. So, we haven’t seen it get any higher.

Ivy Zelman

Got it. And then if I may a few more questions, but just on the G&A which was lower driving better FFO, is that sustainable and if so what’s driving it?

Dave Stockert

Well, some of it is the fact that we are down one senior executive. So, there is a small amount in there for that and then some of it is just timing of different various accruals. If we look at our run-rate for the year, it will be down year-over-year, but not as much as the case in this quarter.

Ivy Zelman

Got it. And then Dave, just big picture, you are in many markets where there is expectation for pretty substantial increase in overall deliveries, do you see any change given that there is not as many supply governors in your markets or do you think starts are going to decelerate in ‘16 and ‘17 just sort of your outlook we have given what you know was permanent in ‘14 and ‘15 and therefore delivering in ‘16 and ‘17, I think do you think starts are going to start to decelerate?

Dave Stockert

Well, I think that there are some reasons why starts will be tempered going forward some of it is the financing side and some of it’s on the cost side, just the construction costs, land costs. And I think that’s that pressure continues to be there in the market. I might take exception with the idea that it’s so hard to develop in some markets versus others. I think we are seeing that play out in New York, San Francisco and others. The thing that I would go back to the comment Ivy that Jamie made what I think you will see happen for the rest of this cycle is that the products that will come in for the market in new development will be geared towards the very high end of the market, much of it will be high rise product, much of it will be at price points that will be a bigger gap to our existing income at portfolio. So I think the question that I worry about as it relates to supply and demand is really demand side and where we see the ongoing job market – job growth that we have seen in some of these markets where we have had 3% and 4% north of job growth, if that sustains that I feel pretty good about how our portfolio is positioned against the new supply. If you saw a big moderation in job growth and I think that’s more challenging.

Ivy Zelman

Got it. And lastly for me, Jamie on move out to buy you mentioned 19%, was there any outliers where we saw higher and lower can do any market specifics within the 19%?

Jamie Teabo

Sure. There are outliers and let me pull that up for you. Austin was at 24% which is where it’s really been tracking all year and then Raleigh is 39%. So, those would be the two outliers about the portfolio average.

Ivy Zelman

Great. Thanks guys. Good luck.

Jamie Teabo

Thank you.

Dave Stockert

Thank you.

Operator

And at this time we have no further questions from the audience. I would like to turn the floor back to Mr. Dave Stockert for any additional or closing remarks.

Dave Stockert

Well, thank you all for joining us today. And we will talk to you next time. Take care.

Operator

Ladies and gentlemen, that does conclude today’s conference. We appreciate your participation. You may now disconnect.

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