Post Properties, Inc. is a self-administrated and self-managed equity real estate investment trust (REIT). The company’s segments include Fully stabilized (same store) communities, which includes apartment communities that have been stabilized for both the current and prior year; Newly stabilized communities, which includes communities that reached stabilized occupancy in the prior year; Lease-up communities, which includes communities that are under development, rehabilitation and in lease-up but were not stabilized by the beginning of the current year, including communities that stabilized during the current year; Acquired communities, which include communities acquired in the current or prior year, and Held for sale and sold communities, which include apartment and mixed-use communities classified as held for sale or sold. Its operating divisions include Post Apartment Management, Post Construction and Property Services, Post Investment Group and Post Corporate Services.
The management team of Post is terrific. They are very patient in acquiring land to ensure their moves are accretive to shareholders. Once land is acquired, it is developed quickly into high quality, well appointed communities. As communities mature, Post periodically sells communities when valuations are full and redeploys capital into new opportunities. Management has a great track record of returning cash to shareholders and has continued to do this consistently. Post recently announced they have signed a joint venture agreement with a Denver based builder that paves the way for Post to re-enter the Denver market. They sold their last community in Denver in 2007. Pretty good timing.
When Post looks for opportunistic markets, a key attribute they look for is above average job growth. Management has been very selective in entering new markets. The brand is established in existing markets and renters know the apartments are fairly priced. Entering new markets requires Post to spend money to establish the brand. Management believes that there is a terrific opportunity to re-enter the Denver market and do very well.
Post holds a very strong portfolio of communities. Thier two largest markets are located in Atlanta and Dallas. Each of these respective economies have had strong rent occupancy rates. A screenshot of Posts entire portfolio is below.
The only market that hasn’t been strong in the last year is Houston due to the dip in oil prices. However, oil prices have stabilized and Post is seeing improvement. All of the other markets have been very strong with solid renewal rates.
Equity REIT’s require a bit of extra thought from potential investors. I believe that Post has one of the best real estate portfolios in the business. They have historically done very well in their dispositions which has allowed them to reinvest in new opportunities. Below is a screenshot of dispositions.
It is very common for Post to sell their communities with large gains due to depreciation rules set by the Financial Accounting Standards Board (FASB). Post depreciates its properties on a straight-line basis over 40 years. However, it is common that real estate prices will rise over time creating a large variance between book and market values. Because of Post’s terrific real estate portfolio, I believe they are accumulating large gains on top of the growing rent cash flows.
Funds From Operations
The metric that I am using to value Post is Funds from Operations (FFO). This metric was created by the National Association of Real Estate Investment Trusts (“NAREIT”). It is defined as net income available to common shareholders determined in accordance with GAAP, excluding gains (or losses) from extraordinary items and sales of depreciable property, plus depreciation of real estate assets, and after adjustment for unconsolidated partnerships and joint ventures all determined on a consistent basis in accordance with GAAP. Below is Post’s FFO.
I expect Post to earn $3.25 in FFO in 2017 which prices the stock at about 19x forward FFO and this excludes gains on deprecated communities. I think the hidden value in the stock are these gains that are accumulating. I don’t expect large rent growth over the next ten years but I do believe the value of their portfolio will continue to grow and appreciate.
The Post brand holds value with Millennials. Post apartments are seen as hip and they have great locations. Post is in a secular market that is being driven by the massive amount of student debt.
There is currently $1.3 trillion in student loan debt and it continues to grow. It is projected there will be $15 trillion by 2030. We are in a new environment where Millennials want luxury accommodations but most can not afford to own a new luxury home. Instead, they are going to rent nice apartments from companies like Post Properties. It will take years for the mid to late Millennials to get out from their student loans and be in a position to own a new home. In addition, this isn’t just going to be a trend with Millennials. Generation Z will have this same problem. Actually, it could take Gen Z longer to get rid of their student loans which means they will have to postpone purchasing their dream house for even longer.
I believe the large amount of student debt is driving the demand for apartments. However, there is a theory that Millennials are adverse to making large purchases and enjoy moving around. Research indicates that Millennials move around more than prior generations. We just don’t know what is driving this behavior. If Millennials could purchase houses, would they do it and stop moving around? Who knows, but it doesn’t matter. We know that Millennials are soaked in debt and they are moving around. This is a good environment for Post.
The financial overview of Post is pretty simple. As mentioned, the way that I value the company is using the FFO. Historically, the stock has traded with a FFO between 16 and 22. Today we are right in the middle at 19. I believe that this is a fair price to pay considering the environment we are in. After all, the 10 year yield is hovering around 1.55% and Post yields a healthy 3% dividend.
Post Properties has an extraordinary portfolio of properties. These properties have exceptional locations and are seen as hip to Millennials. The amount of debt that is weighing on the Millennial generation is not going away. I believe that we are going to continue to see strong demand for luxury apartments be driven by student loan debt. Post is a growing business with a nice yield and has phenomenal management. I think investors have a lot to look forward to.