ITEM 1. BUSINESS
THE COMPANY
Post Properties, Inc. (the "Company") is one of the largest developers and operators of upscale multifamily apartment communities in the United States. The Company currently owns 87 stabilized communities (the "Communities") containing 30,062 apartment units located primarily in metropolitan Atlanta, Georgia; Dallas, Texas and Tampa Florida. In addition, the Company currently has under construction or in initial lease-up eight new communities and additions to two existing communities in the Atlanta, Georgia; Tampa, Florida; Denver, Colorado; Charlotte, North Carolina; New York City, New York; Pasadena, California and Washington D.C. metropolitan areas that will contain an aggregate of 2,604 apartment units upon completion. For the year ended December 31, 2001, the average economic occupancy rate (defined as gross potential rent less vacancy losses, model expenses and bad debt divided by gross potential rent) of the 76 Communities stabilized for the entire year was 94.5%. The average monthly rental rate per apartment unit at these Communities for December 2001 was $991. The Company is a fully integrated organization with multifamily development, operation and asset management expertise. The Company has approximately 1,235 employees, none of whom is a party to a collective bargaining agreement.
Since its founding in 1971, the Company has pursued three distinctive core business strategies that have remained substantially unchanged:
Investment Building Investment building means taking a long-term view of the assets the Company creates. The Company develops communities with the intention of operating them for periods that are relatively long by the standards of the apartment industry. Key elements of the Company's investment building strategy include instilling a disciplined team approach to development decisions, selecting sites in urban infill locations in strong primary markets, consistently constructing new apartment communities with a uniformly high quality and conducting ongoing property improvements.
Promotion of the Post(R) Brand Name The Post(R) brand name strategy has been integral to the success of the Company and, to the knowledge of the Company, has not been successfully duplicated within the multifamily real estate industry in any major U.S. market. For such a strategy to work, a company must develop and implement systems to achieve uniformly high quality and value throughout its operations. As a result of the Company's efforts in developing and maintaining its communities, the Company believes that the Post(R) brand name is synonymous with quality upscale apartment communities that are situated in desirable locations and provide superior resident service. Key elements in implementing the Company's brand name strategy include extensively utilizing the trademarked brand name, adhering to quality in all aspects of the Company's operations, developing and implementing leading edge training programs, and coordinating the Company's advertising programs to increase brand name recognition.
Service Orientation The Company's mission statement is: "To provide the superior apartment living experience for our residents." By striving to provide a superior product and superior service, the Company believes that it will be able to achieve its long-term goals. The Company believes that it provides its residents with superior product and superior service through its uniformly high quality construction, selective urban infill locations, award winning landscaping and landscape courtyards with water features and numerous amenities, including on site business centers, on site courtesy officers, urban vegetable gardens and state of the art fitness centers. The Company believes that with the implementation of these strategies, multifamily properties in its primary markets have the potential over long term to provide investment returns that exceed national averages.
The Company is a self-administrated and self-managed equity real estate investment trust (a "REIT"). In 1993, the Company completed an initial public offering of its Common Stock (the "Initial Offering") and a business combination involving entities under varying common ownership. Proceeds from the Initial Offering were used by the Company, in part, to acquire a controlling interest in Post Apartment Homes, L.P. (the "Operating Partnership"), the Company's principal operating subsidiary,
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which was formed to succeed to substantially all of the ownership interest in a portfolio of 40 Post(R) multifamily apartment communities, all of which were developed by the Company and owned by affiliates of the Company, and to the development, leasing, landscaping and management business of the Company and certain other affiliates.
The Company, through wholly owned subsidiaries, is the sole general partner of, and controls a majority of the limited partnership interests in, the Operating Partnership. The Company conducts all of its business through the Operating Partnership and its subsidiaries.
The Company's and the Operating Partnership's executive officers are located at 4401 Northside Parkway, Suite 800, Atlanta, Georgia 30327 and their telephone number is (404) 846-5000. Post Properties, Inc., a Georgia corporation, was incorporated on January 25, 1984, and is the successor by merger to the original Post Properties, Inc., a Georgia corporation, which was formed in 1971. The Operating Partnership is a Georgia limited partnership that was formed in July 1993 for the purpose of consolidating the operating and development business of the Company and the Post(R) apartment portfolio described herein.
THE OPERATING PARTNERSHIP
The Operating Partnership, through the operating divisions and subsidiaries described below, is the entity through which all of the Company's operations are conducted. At December 31, 2001, the Company, through wholly owned subsidiaries, controlled the Operating Partnership as the sole general partner and as the holder of 87.8% of the common units in the Operating Partnership ("Common Units") and 63.6% of the preferred Units (the "Perpetual Preferred Units"). The other limited partners of the Operating Partnership, who hold Common Units, are those persons (including certain officers and directors of the Company) who, at the time of the Initial Offering, elected to hold all or a portion of their interest in the form of Common Units rather than receiving shares of Common Stock. Each Common Unit may be redeemed by the holder thereof for either one share of Common Stock or cash equal to the fair market value thereof at the time of such redemption, at the option of the Operating Partnership. The Operating Partnership presently anticipates that it will cause shares of Common Stock to be issued in connection with each such redemption (as had been done in all redemptions to date) rather than paying cash. With each redemption of outstanding Common Units for Common Stock, the Company's percentage ownership interest in the Operating Partnership will increase. In addition, whenever the Company issues shares of stock, the Company will contribute any net proceeds therefrom to the Operating Partnership and the Operating Partnership will issue an equivalent number of Units or Perpetual Preferred Units, as appropriate, to the Company.
As the sole shareholder of the Operating Partnership's sole general partner, the Company has the exclusive power under the agreement of limited partnership of the Operating Partnership to manage and conduct the business of the Operating Partnership, subject to the consent of the holders of the Common Units in connection with the sale of all or substantially all of the assets of the Operating Partnership or in connection with a dissolution of the Operating Partnership. The board of directors of the Company manages the affairs of the Operating Partnership by directing the affairs of the Company. The Operating Partnership cannot be terminated, except in connection with a sale of all or substantially all of the assets of the Company, for a period of 50 years without a vote of limited partners of the Operating Partnership. The Company's indirect limited and general partner interests in the Operating Partnership entitle it to share in cash distributions from, and in the profits and loss of, the Operating Partnership in proportion to the Company's percentage interest therein and indirectly entitle the Company to vote on all matters requiring a vote of the limited partnership.
As part of the formation of the Operating Partnership, a holding company, Post Services, Inc. ("Post Services") was organized as a separate corporate subsidiary of the Operating Partnership. Through Post Services and its subsidiaries, the Operating Partnership provides leasing, landscaping and property management services to third parties. Certain officers and directors of the Company received 99%, collectively, of the voting common stock of Post Services, and the Operating Partnership received 1% of the voting common stock and 100% of the nonvoting common stock of Post Services. The voting and nonvoting common stock of Post Services held by the Operating Partnership represents 99% of the equity interests therein. The voting common stock held by officers and directors in Post Services is subject to an agreement that is designed to ensure that the stock will be held by one or more officers of Post Services. The by-laws of Post Services provide that a majority of the board of directors of Post Services must be persons who are not employees, members of management or affiliates of the Company or its subsidiaries. This by-law provision cannot be amended without the vote of 100% of the outstanding voting common stock of Post Services. Post Services currently has the same board of directors as the Company.
For taxable years ending on or before December 31, 2000, the Operating Partnership could not own more than 10% of the voting stock of Post Services without causing the Company to fail to qualify as a REIT for federal income tax purposes. This restriction no longer applies to the voting stock of a "taxable REIT subsidiary" as defined in the Internal Revenue Code. The
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Company and Post Services have filed a joint election to have Post Services treated as a taxable REIT subsidiary of the Company. This will enable the Operating Partnership to acquire all of the voting stock of Post Services without jeopardizing the company's status as a REIT. Management believes the Operating Partnership will acquire the remaining interest of Post Services in 2002.
OPERATING DIVISIONS
The major operating divisions of the Operating Partnership include:
Post Apartment Management Post Apartment Management is responsible for the day-to-day operations of all the Post(R) communities including community leasing, property management and personnel recruiting, training and development, maintenance and security. Post Apartment Management also conducts short-term corporate apartment leasing activities and is the largest division in the Company.
Post Apartment Development Post Apartment Development conducts the development and construction activities of the Company. These activities include site selection, zoning and regulatory approvals, project design and the full range of construction management services.
Post Corporate Services Post Corporate Services provides executive direction and control to the Company's other divisions and subsidiaries and has responsibility for the creation and implementation of all Company financing and capital strategies. All accounting, management reporting, information systems, human resources, legal and insurance services required by the Company and all of its affiliates are centralized in Post Corporate Services.
OPERATING SUBSIDIARIES
In periods prior to December 31, 2001, the Operating Partnership provided third party asset management and leasing services for multifamily properties not operating under the Post (R) name through RAM Partners, Inc. ("RAM"). Additionally in prior periods, the Operating Partnership provided landscape installation and maintenance services to third parties through Post Landscape Services, Inc. ("Post Landscape"). In the fourth quarter of 2001, the net assets and operating businesses of RAM and Post Landscape were sold to their respective management teams. The Company and the Operating Partnership will no longer provide these services to unaffiliated third parties. Instead, the Operating Partnership will focus its continuing efforts on its core business of owning, developing and managing Post (R) brand multifamily real estate assets.
HISTORY OF POST PROPERTIES, INC.
During the five-year period from January 1, 1997 through December 31, 2001, the Company and affiliates have developed and completed 11,545 apartment units in 26 apartment communities, acquired 6,296 units in 26 apartment communities (the acquisitions were a result of the merger with Columbia Realty Trust (the "Merger")) and sold 16 apartment communities containing an aggregate of 5,397 apartment units. Historically, the Company has primarily developed its apartment communities to the Company's specifications as opposed to buying or refurbishing existing properties built by others. The Company and its affiliates have sold apartment communities after holding them for investment periods that typically have been seven to twelve years after development. The following table shows the result of the Company's developments during this period:
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(1) As part of the Merger, the Company acquired 26 communities containing 6,296 units. Of the communities acquired in the Merger, 14 communities containing 3,916 units were built by Columbus and 12 communities containing 2,380 units were acquired by Columbus.
CURRENT DEVELOPMENT
The Company has under construction or in initial lease-up eight new communities and additions to two existing communities that will contain an aggregate of 2,604 units upon completion. The Company's communities under development or in initial lease-up are summarized in the following table:
(a) These communities are being developed in joint ventures (Post equity ownership is 35 percent). (b) This development is structured as a joint venture, with Post and its development partner contributing approximately 70% of the equity and a landowner contributing the balance. (c) This development is structured as a joint venture, with Post and its development partner. Post will contribute substantially all of the capital to the joint venture. (d) Increase in cost related to upgrading the planned apartment unit finishes.
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COMPETITION
All of the Communities are located in developed areas that include other upscale apartments. The number of competitive upscale apartment properties in a particular area could have a material effect on the Company's ability to lease apartment units at the Communities or at any newly developed or acquired communities and on the rents charged. The Company may be competing with others that have greater resources than the Company. In addition, other forms of residential properties, including single family housing, provide housing alternatives to potential residents of upscale apartment communities.
AMERICANS WITH DISABILITIES ACT
The Communities and any newly acquired apartment communities must comply with Title III of the Americans with Disabilities Act (the "ADA") to the extent that such properties are "public accommodations" and/or "commercial facilities" as defined by the ADA. Compliance with the ADA requirements could require removal of structural barriers to handicapped access in certain public areas of the Company's Communities where such removal is readily achievable. The ADA does not, however, consider residential properties, such as apartment communities, to be public accommodations or commercial facilities, except to the extent portions of such facilities, such as the leasing office, are open to the public. The Company believes that its properties comply with all present requirements under the ADA and applicable state laws. Noncompliance could result in imposition of fines or an award of damages to private litigants. If required to make material additional changes, the Company's results or operations could be adversely affected.
ENVIRONMENTAL REGULATIONS
The Company is subject to Federal, state and local environmental regulations that apply to the development of real property, including construction activities, the ownership of real property, and the operation of multifamily apartment communities.
In developing properties and constructing apartments, the Company utilizes environmental consultants to determine whether there are any flood plains, wetlands or environmentally sensitive areas that are part of the property to be developed. If flood plains are identified, development and construction is planned so that flood plain areas are preserved or alternative flood plain capacity is created in conformance with Federal and local flood plain management requirements.
Storm water discharge from a construction facility is evaluated in connection with the requirements for storm water permits under the Clean Water Act. This is an evolving program in most states. The Company currently anticipates it will be able to obtain storm water permits for existing or new development.
The Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. sec. 9601 et seq. ("CERCLA"), and applicable state superfund laws subject the owner or real property to claims or liability for the costs or removal or remediation of hazardous substances that are disposed of on real property in amounts that require removal or remediation. Liability under CERCLA and applicable state superfund laws can be imposed on the owner of real property or the operator of a facility without regard to fault or even knowledge of the disposal of hazardous substances on the property or at the facility. The presence of hazardous substances in amounts requiring response action or the failure to undertake remediation where it is necessary may adversely affect the owner's ability to sell real estate or borrow money using such real estate as collateral. In addition to claims for cleanup costs, the presence of hazardous substances on a property could result in a claim by a private party for personal injury or a claim by an adjacent property owner for property damage.
The Company has instituted a policy that requires an environmental investigation of each property that it considers for purchase or that it owns and plans to develop. The environmental investigation is conducted by a qualified environmental consultant. If there is any indication of contamination, sampling of the property is performed by the environmental consultant. The environmental investigation report is reviewed by the Company and counsel prior to purchase of any property. If necessary, remediation of contamination, including underground storage tanks, is undertaken prior to development.
The Company has not been notified by any governmental authority of any noncompliance, claim, or liability in connection with any of the Communities. The Company has not been notified of a claim for personal injury or property damage by a private party in connection with any of the Communities in connection with environmental conditions. The Company is not aware of any environmental condition with respect to any of the Communities that could be considered to be material.
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RISK FACTORS
The following risk factors apply to the Company and the Operating Partnership. All indebtedness described in the risk factors has been incurred by the Operating Partnership.
UNFAVORABLE CHANGES IN APARTMENT MARKETS AND ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OCCUPANCY LEVELS AND RENTAL RATES.
Market and economic conditions in the various metropolitan areas of the United States where the Company operates may significantly affect occupancy levels and rental rates and therefore profitability. Factors that may adversely affect these conditions include the following:
- - the economic climate, which may be adversely impacted by a reduction in jobs, industry slowdowns and other factors; - - local conditions, such as oversupply of, or reduced demand for, apartment homes; - - a future economic downturn that simultaneously affects one or more of the Company's geographic markets; o declines in household formation; - - rent control or stabilization laws, or other laws regulating rental housing, which could prevent the Company from raising rents to offset increases in operating costs; and - - competition from other available apartments and other housing alternatives and changes in market rental rates.
Any of these factors could adversely affect the Company's ability to achieve desired operating results from its communities.
DEVELOPMENT AND CONSTRUCTION RISKS COULD IMPACT THE COMPANY'S PROFITABILITY.
The Company intends to continue to develop and construct apartment communities. Development activities may be conducted through wholly-owned affiliated companies or through joint ventures with unaffiliated parties. The Company's development and construction activities may be exposed to the following risks:
- - the Company may be unable to obtain, or face delays in obtaining, necessary zoning, land-use, building, occupancy, and other required governmental permits and authorizations, which could result in increased development costs; - - the Company may incur construction costs for a property that exceed original estimates due to increased materials, labor or other costs, which could make completion of the property uneconomical, and the Company may not be able to increase rents to compensate for the increase in construction costs; - - the Company intends to concentrate its attention on fewer markets and reduce annual development expenditures, and it may abandon development opportunities that it has already begun to explore, and it may fail to recover expenses already incurred in connection with exploring those opportunities; - - the Company has been and may continue to be unable to complete construction and lease-up of a community on schedule and meet financial goals for development projects;
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- - because occupancy rates and rents at a newly developed community may fluctuate depending on a number of factors, including market and economic conditions, the Company may be unable to meet its profitability goals for that community; and - - construction costs have been increasing in the Company's existing markets, and may continue to increase in the future and, in some cases, the costs of upgrading acquired communities have, and may continue to, exceed original estimates and the Company may be unable to charge rents that would compensate for these increases in costs.
FAILURE TO SUCCEED IN NEW MARKETS MAY LIMIT THE COMPANY'S GROWTH.
The Company may from time to time commence development activity or make acquisitions outside of its existing market areas if appropriate opportunities arise. The Company's historical experience in its existing markets does not ensure that it will be able to operate successfully in new markets. The Company may be exposed to a variety of risks if it chooses to enter new markets. These risks include, among others:
- - an inability to evaluate accurately local apartment market conditions and local economies; - - an inability to obtain land for development or to identify appropriate acquisition opportunities; - - an inability to hire and retain key personnel; and - - lack of familiarity with local governmental and permitting procedures.
POSSIBLE DIFFICULTY OF SELLING APARTMENT COMMUNITIES COULD LIMIT THE COMPANY'S OPERATIONAL AND FINANCIAL FLEXIBILITY.
Although the Company has experienced success in disposing of apartment communities that no longer meet its strategic objectives, market conditions could change and purchasers may not be willing to pay acceptable prices. A weak market may limit the Company's ability to change its portfolio promptly in response to changing economic conditions. Also, if the Company is unable to sell apartment communities or if it can only sell apartment communities at prices lower than are generally acceptable, then the Company may have to take on additional leverage in order to provide adequate capital to execute its development and construction strategy. Furthermore, a portion of the proceeds from the Company's overall property sales in the future may be held in escrow accounts in order for some sales to qualify as like-kind exchanges under Section 1031 of the Internal Revenue Code so that any related capital gain can be deferred for federal income tax purposes. As a result, the Company may not have immediate access to all of the cash flow generated from property sales.
CHANGING INTEREST RATES COULD INCREASE INTEREST COSTS AND COULD AFFECT THE MARKET PRICE OF THE COMPANY'S SECURITIES.
The Company has incurred, and expects to continue to incur, debt-bearing interest at rates that vary with market interest rates. Therefore, if interest rates increase, the Company's interest costs will rise to the extent its variable rate debt is not hedged effectively. In addition, an increase in market interest rates may lead purchasers of the Company's securities to demand a higher annual yield, which could adversely affect the market price of the Company's common and preferred stock and debt securities.
FAILURE TO GENERATE SUFFICIENT CASH FLOWS COULD AFFECT THE COMPANY'S DEBT FINANCING AND CREATE REFINANCING RISK.
The Company is subject to the risks normally associated with debt financing, including the risk that its cash flow will be insufficient to make required payments of principal and interest. Although the Company may be able to use cash flow to make future principal payments, it cannot assure investors that sufficient cash flow will be available to make all required principal payments and still satisfy the distribution requirements that the Company must satisfy in order to maintain its status as a real estate investment trust or "REIT" for federal income tax purposes. The following factors, among others, may affect the cash flows generated by the Company's apartment communities:
- - the national and local economies; - - local real estate market conditions, such as an oversupply of apartment homes; - - the perceptions by prospective residents of the safety, convenience and attractiveness of the Company's communities and the neighborhoods in which they are located; - - the Company's ability to provide adequate management, maintenance and insurance; and - - rental expenses, including real estate taxes and utilities.
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Expenses associated with the Company's investment in a community, such as debt service, real estate taxes, insurance and maintenance costs, are generally not reduced when circumstances cause a reduction in cash flows from operations from that community. If a community is mortgaged to secure payment of debt and the Company is unable to make the mortgage payments, the Company could sustain a loss as a result of foreclosure on the community or the exercise of other remedies by the mortgagee. The Company is likely to need to refinance at least a portion of its outstanding debt as it matures. There is a risk that the Company may not be able to refinance existing debt or that the terms of any refinancing will not be as favorable as the terms of the existing debt. As of December 31, 2001, the Company had outstanding mortgage indebtedness of approximately $465,318, senior unsecured debt of approximately $703,000 and outstanding indebtedness under its lines of credit and other unsecured debt aggregating $168,202.
THE COMPANY COULD BECOME MORE HIGHLY LEVERAGED WHICH COULD RESULT IN AN INCREASED RISK OF DEFAULT AND IN AN INCREASE IN ITS DEBT SERVICE REQUIREMENTS.
The Company's board of directors has adopted a policy of limiting indebtedness to approximately 60% of the undepreciated book value of its assets, but the Company's organizational documents do not contain any limitation on the amount or percentage of indebtedness, funded or otherwise, that it might incur. If this policy were changed, the Company could become more highly leveraged, resulting in an increase in debt service that could adversely affect funds from operations and the Company's ability to make expected distributions to its shareholders and the Operating Partnership's ability to make expected distributions to its limited partners and in an increased risk of default on the obligations of the Company and the Operating Partnership. In addition, the Company's and the Operating Partnership's ability to incur debt is limited by covenants in bank and other credit agreements. The Company manages its debt to be in compliance with its stated policy and with these debt covenants, but subject to compliance with these covenants, the Company may increase the amount of outstanding debt at any time without a concurrent improvement in the Company's ability to service the additional debt. Accordingly, the Company could become more leveraged, resulting in an increased risk of default on its obligations and in an increase in debt service requirements, both of which could adversely affect the Company's financial condition and ability to access debt and equity capital markets in the future.
DEBT FINANCING MAY NOT BE AVAILABLE AND EQUITY ISSUANCES COULD BE DILUTIVE TO THE COMPANY'S SHAREHOLDERS.
The Company's ability to execute its business strategy depends on its access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including common and preferred equity. Debt financing may not be available in sufficient amounts, or on favorable terms or at all. If the Company issues additional equity securities to finance developments and acquisitions instead of incurring debt, the interests of existing shareholders could be diluted.
ACQUIRED COMMUNITIES MAY NOT ACHIEVE ANTICIPATED RESULTS.
The Company intends to continue to selectively acquire apartment communities that meet its investment criteria. The Company's acquisition activities and their success may be exposed to the following risks:
- - an acquired community may fail to achieve expected occupancy and rental rates and may fail to perform as expected; - - the Company may not be able to successfully integrate acquired properties and operations; and - - the Company's estimates of the costs of repositioning or redeveloping the acquired property may prove inaccurate, causing the Company to fail to meet its profitability goals.
INCREASED COMPETITION COULD LIMIT THE COMPANY'S ABILITY TO LEASE APARTMENT HOMES OR INCREASE OR MAINTAIN RENTS.
The Company's apartment communities compete with numerous housing alternatives in attracting residents, including other apartment communities and single-family rental homes, as well as owner occupied single- and multi-family homes. Competitive housing in a particular area could adversely affect the Company's ability to lease apartment homes and increase or maintain rents.
LIMITED INVESTMENT OPPORTUNITIES COULD ADVERSELY AFFECT THE COMPANY'S GROWTH.
The Company expects that other real estate investors will compete to acquire existing properties and to develop new properties. These competitors include insurance companies, pension and investment funds, developer partnerships, investment companies and other apartment REITs. This competition could increase prices for properties of the type that the Company would likely
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pursue, and competitors may have greater resources than the Company. As a result, the Company may not be able to make attractive investments on favorable terms, which could adversely affect its growth.
INTEREST RATE HEDGING CONTRACTS MAY BE INEFFECTIVE AND MAY RESULT IN MATERIAL CHARGES.
From time to time when the Company anticipates issuing debt securities, it may seek to limit exposure to fluctuations in interest rates during the period prior to the pricing of the securities by entering into interest rate hedging contracts. The Company may do this to increase the predictability of its financing costs. Also, from time to time, the Company may rely on interest rate hedging contracts to limit its exposure under variable rate debt to unfavorable changes in market interest rates. If the pricing of new debt securities is not within the parameters of, or market interest rates produce a lower interest cost than the Company incurs under, a particular interest rate hedging contract, the contract is ineffective. Furthermore, the settlement of interest rate hedging contracts has involved and may in the future involve material charges. These charges are typically related to the extent and timing of fluctuations in interest rates. Despite the Company's efforts to minimize its exposure to interest rate fluctuations, the Company cannot guarantee that it will maintain coverage for all of its outstanding indebtedness at any particular time. If the Company does not effectively protect itself from this risk, it may be subject to increased interest costs resulting from interest rate fluctuations.
TERRORIST ATTACKS AND THE POSSIBILITY OF WIDER ARMED CONFLICT MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS AND OPERATING RESULTS AND COULD DECREASE THE VALUE OF OUR ASSETS.
Terrorist attacks and other acts of violence or war, such as those that took place on September 11, 2001, could have a material adverse effect on our business and operating results. There can be no assurance that there will not be further terrorist attacks against the United States or its businesses or interests. Attacks or armed conflicts that directly impact one or more of our apartment communities could significantly affect our ability to operate those communities and thereby impair our ability to achieve our expected results. Further, the Company's insurance coverage may not cover any losses caused by a terrorist attack. In addition, the adverse effects that such violent acts and threats of future attacks could have on the U.S. economy could similarly have a material adverse effect on our business and results of operations. Finally, further terrorist acts could cause the United States to enter into a wider armed conflict which could further impact our business and operating results.
LOSSES FROM NATURAL CATASTROPHES MAY EXCEED INSURANCE COVERAGE.
The Company carries comprehensive liability, fire, flood, extended coverage and rental loss insurance on its properties, which are believed to be of the type and amount customarily obtained on real property assets. The Company intends to obtain similar coverage for properties acquired in the future. However, some losses, generally of a catastrophic nature, such as losses from floods or earthquakes, may be subject to limitations. The Company exercises discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to maintaining appropriate insurance on its investments at a reasonable cost and on suitable terms. If the Company suffers a substantial loss, its insurance coverage may not be sufficient to pay the full current market value or current replacement value of the lost investment. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it infeasible to use insurance proceeds to replace a property after it has been damaged or destroyed.
POTENTIAL LIABILITY FOR ENVIRONMENTAL CONTAMINATION COULD RESULT IN SUBSTANTIAL COSTS.
The Company is in the business of acquiring, developing, owning, operating and, from time to time, selling real estate. Under various federal, state and local environmental laws, as a current or former owner or operator, the Company could be required to investigate and remediate the effects of contamination of currently or formerly owned real estate by hazardous or toxic substances, often regardless of its knowledge of or responsibility for the contamination and solely by virtue of its current or former ownership or operation of the real estate. In addition, the Company could be held liable to a governmental authority or to third parties for property damage and for investigation and clean-up costs incurred in connection with the contamination. These costs could be substantial, and in many cases environmental laws create liens in favor of governmental authorities to secure their payment. The presence of such substances or a failure to properly remediate any resulting contamination could materially and adversely affect the Company's ability to borrow against, sell or rent an affected property.
COMPLIANCE OR FAILURE TO COMPLY WITH LAWS REQUIRING ACCESS TO THE COMPANY'S PROPERTIES BY DISABLED PERSONS COULD RESULT IN SUBSTANTIAL COST.
The Americans with Disabilities Act, the Fair Housing Act of 1988 and other federal, state and local laws generally require that public accommodations be made accessible to disabled persons. Noncompliance could result in the imposition of fines by the government or the award of damages to private litigants. These laws may require the Company to modify its existing properties. These laws may also restrict renovations by requiring improved access to such buildings by disabled persons or may require the Company to add other structural features that increase construction costs. Legislation or regulations adopted in the future may impose further burdens or restrictions on the Company with respect to improved access by disabled persons. The Company cannot ascertain the costs of compliance with these laws, which may be substantial.
THE COMPANY MAY FAIL TO QUALIFY AS A REIT FOR FEDERAL INCOME TAX PURPOSES.
The Company's qualification as a REIT for federal income tax purposes depends upon its ability to meet on a continuing basis, through actual annual operating results, distribution levels and diversity of stock ownership, the various qualification tests and
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organizational requirements imposed upon REITs under the Internal Revenue Code. The Company believes that it has qualified for taxation as a REIT for federal income tax purposes commencing with its taxable year ended December 31, 1993, and plans to continue to meet the requirements to qualify as a REIT in the future. Many of these requirements, however, are highly technical and complex. The Company cannot guarantee, therefore, that it has qualified or will continue to qualify in the future as a REIT. The determination that the Company qualifies as a REIT for federal income tax purposes requires an analysis of various factual matters that may not be totally within the Company's control. Even a technical or inadvertent mistake could jeopardize the Company's REIT status. Furthermore, Congress and the IRS might make changes to the tax laws and regulations, and the courts might issue new decisions that make it more difficult, or impossible, for the Company to remain qualified as a REIT. The Company does not believe, however, that any pending or proposed tax law changes would jeopardize its REIT status.
If the Company were to fail to qualify for taxation as a REIT in any taxable year, and certain relief provisions of the Internal Revenue Code did not apply, the Company would be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates, leaving less money available for distributions to its shareholders. In addition, distributions to shareholders in any year in which the Company failed to qualify would not be deductible by the Company for federal income tax purposes nor would they be required to be made. Unless entitled to relief under specific statutory provisions, the Company also would be disqualified from taxation as a REIT for the four taxable years following the year during which it ceased to qualify as a REIT. It is not possible to predict whether in all circumstances the Company would be entitled to such statutory relief. The Company's failure to qualify as a REIT likely would have a significant adverse effect on the value of its securities.
THE OPERATING PARTNERSHIP MAY FAIL TO BE TREATED AS A PARTNERSHIP FOR FEDERAL INCOME TAX PURPOSES.
Management believes that the Operating Partnership qualifies, and has so qualified since its formation, as a partnership for federal income tax purposes and not as a publicly traded partnership taxable as a corporation. No assurance can be provided, however, that the IRS will not challenge the treatment of the Operating Partnership as a partnership for federal income tax purposes or that a court would not sustain such a challenge. If the IRS were successful in treating the Operating Partnership as a corporation for federal income tax purposes, then the taxable income of the Operating Partnership would be taxable at regular corporate income tax rates. In addition, the treatment of the Operating Partnership as a corporation would cause the Company to fail to qualify as a REIT. See "--The Company may fail to qualify as a REIT for federal income tax purposes" above.
THE COMPANY'S SHAREHOLDERS MAY NOT BE ABLE TO EFFECT A CHANGE IN CONTROL.
The articles of incorporation and bylaws of the Company, the partnership agreement of the Operating Partnership, and the Georgia Business Corporation Code contain a number of provisions that could delay, defer or prevent a transaction or a change in control that might involve a premium price for the Company's shareholders or otherwise be in their best interests, including the following:
Ownership Limit. One of the requirements for maintenance of the Company's qualification as a REIT for federal income tax purposes is that no more than 50% in value of its outstanding capital stock may be owned by five or fewer individuals, including entities specified in the Internal Revenue Code, during the last half of any taxable year. Primarily to facilitate maintenance of its qualification as a REIT for federal income tax purposes, the ownership limit under the Company's articles of incorporation prohibits ownership, directly or by virtue of the attribution provisions of the Internal Revenue Code, by any person or persons acting as a group of more than 6.0% of the issued and outstanding shares of the Company's common stock, subject to an exception for shares of common stock held by Mr. Williams and Mr. Glover, the Company's Chairman and Vice Chairman. Together, these limitations are referred to as the "ownership limit." Further, the Company's articles of incorporation include provisions allowing it to stop transfers of and redeem its shares that are intended to assist the Company in complying with these requirements. These provisions may have the effect of delaying, deferring or preventing someone from taking control, even though a change of control might involve a premium price for the Company's shareholders or might otherwise be in the shareholders' best interests.
Staggered Board. The Company's articles of incorporation provide that the board of directors will consist of eight members and can be increased or decreased after that according to its bylaws, provided that the total number of directors is not less than three nor more than 15. Pursuant to the Company's bylaws, the number of directors will be fixed by the board of directors within the limits in its articles of incorporation. The board of directors is divided into three classes of directors. Directors for each class are chosen for a three-year term. The staggered terms for directors may affect the Company's shareholders' ability to effect a change of control, even if a change of control would be in the interest of the shareholders.
Post Properties, Inc. 10 Post Apartment Homes, L.P.
Preferred shares; classification or reclassification of unissued shares of capital stock without shareholder approval. The Company's articles of incorporation provide that the total number of shares of stock of all classes which it has authority to issue is 120,000,000, consisting of 100,000,000 shares of common stock and 20,000,000 shares of preferred stock, of which 4,900,000 are outstanding as of December 31, 2001. The board of directors has the authority, without a vote of shareholders, to classify or reclassify any unissued shares of stock, including common stock into preferred stock or vice versa, and to establish the preferences and rights of any preferred or other class or series of shares to be issued. The issuance of preferred stock or other shares having special preferences or rights could delay or prevent a change of control even if a change of control would be in the interests of the shareholders. Because the board of directors has the power to establish the preferences and rights of additional classes or series of shares without a shareholder vote, the board of directors may give the holders of any class or series preferences, powers and rights, including voting rights, senior to the rights of holders of the Company's common stock.
Consent rights of the Unitholders. Under the partnership agreement of the Operating Partnership, the Company may not merge or consolidate with another entity unless the merger includes the merger of the Operating Partnership, which requires the approval of the holders of a majority of the outstanding units of limited partnership. If the Company were to ever hold less than a majority of the units, this voting requirement might limit the possibility for an acquisition or a change of control.
Georgia Anti-Takeover Statutes. The Georgia Business Corporation Code generally restricts a company from entering into certain business combinations with an interested shareholder for a period of five years after the date on which the shareholder becomes an interested shareholder unless (1) the transaction is approved by the board of directors of the company prior to the date the person becomes an interested shareholder, (2) the interested shareholder acquires 90% of the company's voting stock in the same transaction in which it exceeds 10% or (3) subsequent to becoming an interested shareholder, the shareholder acquires 90% of the company's voting stock and the business combination is approved by the holders of a majority of the voting stock entitled to vote on the business combination. An interested shareholder is defined as any person or entity that is the beneficial owner of at least 10% of the company's voting stock. This business combination statute will not apply unless the bylaws of the corporation specifically provide that the statute is applicable to the corporation. The Company has not elected to be covered by this statute, but it could so by action of the board of directors at any time.
Georgia Fair Price Statute. The Georgia Fair Price Statute imposes fair price and procedural requirements applicable to business combinations with any person who owns 10% or more of the common stock. These statutory requirements restrict business combinations with, and accumulations of shares of voting stock of, certain Georgia corporations. This fair price statute will not apply unless the bylaws of the corporation specifically provide that the statute is applicable to the corporation. The Company has not elected to be covered by this statute, but it could do so by action of the board of directors at any time.
Post Properties, Inc. 11 Post Apartment Homes, L.P.
ITEM 2.
ITEM 2. PROPERTIES
At February 3, 2002, the Communities consisted of 87 stabilized Post(R) multifamily apartment communities located in the following metropolitan areas:
The Company or its predecessors developed all but 12 of the Post(R) Communities and currently manages all of the Communities. Fifty-two of the Communities have in excess of 300 apartment units, with the largest Community having a total of 916 apartment units. Eighty-two of the eighty-seven Communities, comprising approximately 95% of the Communities' apartment units, were completed after January 1, 1986. The average age of the Communities is approximately eight years. The average economic occupancy rate was 94.9% and 96.6%, respectively, and the average monthly rental rate per apartment unit was $957 and $937, respectively, for communities stabilized for each of the entire years ended December 31, 2001 and 2000. See "Selected Financial Information."
COMMUNITY INFORMATION
Post Properties, Inc. 12 Post Apartment Homes, L.P.
Post Properties, Inc. 13 Post Apartment Homes, L.P.
(1) Refers to greater metropolitan areas of cities indicated. (2) Average economic occupancy is defined as gross potential rent less vacancy losses, model expenses and bad debt divided by gross potential rent for the period, expressed as a percentage. (3) During 2001, this community or a phase in this community was in lease-up and, therefore, is not included (4) These dates represent the respective completion dates for multiple phases of a community. (5) The Company has a leasehold interest in the land underlying Post Renaissance pursuant to a ground lease that expires on January 1, 2040. (6) These communities are comprised of two phases. Only the first phase of each of these communities is stabilized as of February 3, 2002. (7) Post Windhaven(TM) is currently under rehab.
Post Properties, Inc. 14 Post Apartment Homes, L.P.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
The persons who are executive officers of the Company and its affiliates and their positions as of March 1, 2002 are as follows:
The following is a biographical summary of the experience of the executive officers of the Company:
John A. Williams. Mr. Williams is the Chairman of the Board and Chief Executive Officer of the Company and is a Director. Mr. Williams founded the business of the Company in 1971 and since that time has acted as Chairman and Chief Executive Officer. Mr. Williams is currently serving on the board of directors of Crawford & Co. and the Georgia Regional Transportation Authority. Mr. Williams is 59 years old.
John T. Glover. Mr. Glover has been the Vice-Chairman of the Company since February 29, 2000 and a Director since 1984. From 1984 through February 29, 2000, Mr. Glover was President, Chief Operating Officer, and Treasurer of the Company. Mr. Glover is a director of Haverty's Furniture Companies, Inc., a trustee of Emory University and a director of Emory Healthcare, Inc. Mr. Glover is 55 years old.
David P. Stockert. Mr. Stockert joined the Company January 1, 2001 as President and Chief Operating Officer. From July 1999 to October 2000, Mr. Stockert was Executive Vice President of Duke-Weeks Realty Corporation, a publicly traded real estate company. From June 1995 to July 1999, Mr. Stockert was Senior Vice President and Chief Financial Officer of Weeks Corporation, also a publicly traded real estate company that was a predecessor by merger to Duke-Weeks Realty Corporation. From August 1990 to May 1995, Mr. Stockert was an investment banker in the Real Estate Group at Dean Witter Reynolds Inc. (now Morgan Stanley Dean Witter). Mr. Stockert is 39 years old.
Thomas L. Wilkes. Mr. Wilkes joined the Company in October 1997 and, since January 2001, has been the President of Post Apartment Management and the Company's Chief Management Officer. From December 1998 through December 2000, he was an Executive Vice President and Director of Operations for Post Apartment Management responsible for the operations of Post(R)communities in the Western United States. From October 1997 to December 1998 he was an Executive Vice President and Director of Operations of Post West. Mr. Wilkes was a Senior Vice President of Columbus from October 1993 through October 1997. Mr. Wilkes served as President of CRH Management Company, a multifamily property management firm and a member of the Columbus Group, since its formation in October 1990 to December 1993. Mr. Wilkes is a Certified Property Manager. Mr. Wilkes is 42 years old.
Post Properties, Inc. 15 Post Apartment Homes, L.P.
R. Gregory Fox. Mr. Fox has been with the Company since February 1996 and, since October 2000 has served as the Company's Chief Financial Officer. From December 1998 through September 2000, he served as Executive Vice President of Post Corporate Services and the Company's Chief Accounting Officer responsible for financial reporting and planning, accounting, management information systems and human resources. From February 1996 to December 1998, Mr. Fox was a Senior Vice President. Prior to joining the Company, he was a senior manager in the audit division of PriceWaterhouse LLP where he was employed for ten years. Mr. Fox is a Certified Public Accountant and is currently on the board of directors of Realeum, Inc. Mr. Fox is 42 years old.
Sherry W. Cohen. Ms. Cohen has been with the Company for seventeen years. Since October 1997, she has been an Executive Vice President of Post Corporate Services responsible for supervising and coordinating legal affairs and insurance. Since April 1990, Ms. Cohen had also been Corporate Secretary. She was a Senior Vice President with Post Corporate Services from July 1993 to October 1997. Prior thereto, Ms. Cohen was a Vice President of Post Properties, Inc. since April 1990. Ms. Cohen is 47 years old.
Douglas S. Gray. Mr. Gray joined the Company in December 1997 and, since January 1999, has been a Senior Vice President of Post Corporate Services responsible for dispositions and asset management. He was a Vice President of Post Corporate Services from December 1997 to December 1998. Prior to joining Post, Mr. Gray was Vice President of Dutch Institutional Holding Co. from July 1994 to November 1997. Prior thereto, he was Director of Property Services for The Landmarks Group from June 1988 to June 1994. Mr. Gray is a Certified Public Accountant and holds the CCIM designation. Mr. Gray is 42 years old.
Post Properties, Inc. 16 Post Apartment Homes, L.P.
PART II
ITEM 5.
ITEM 5. MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the New York Stock Exchange ("NYSE") under the symbol "PPS." The following table sets forth the quarterly high and low prices per share reported on the NYSE, as well as the quarterly dividends declared per share:
On March 20, 2002, the Company had 1,734 common shareholders of record.
The Company pays regular quarterly dividends to holders of shares of Common Stock. Future distributions by the Company will be at the discretion of the board of directors and will depend on the actual funds from operations of the Company, the Company's financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended (the "Code") and such other factors as the board of directors deems relevant. For a discussion of the Company's credit agreements and their restrictions on dividend payments, see Liquidity and Capital Resources at Management's Discussion and Analysis of Financial Condition and Results of Operations.
During 2001, the Company did not sell any unregistered securities.
There is no established public trading market for the Units. As of March 20, 2002, the Operating Partnership had 103 holders of record of Units of the Operating Partnership.
For each quarter during 2000 and 2001, the Operating Partnership paid a cash distribution to holders of Units equal in amount to the dividend paid on the Company's common stock for such quarter.
During 2001, the Operating Partnership did not sell any unregistered securities.
Post Properties, Inc. 17 Post Apartment Homes, L.P.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
POST PROPERTIES, INC. (Dollars in thousands, except per share and apartment unit data)
Post Properties, Inc. 18 Post Apartment Homes, L.P.
(1) Consists of revenue and expenses from property management and landscape services provided to properties owned by third parties. (2) Project abandonment, employee severance and impairment charges for 2001 consisted of the following: Severance cost - $3.6 million Impairment reserve for technology investments - $1.5 million Impairment reserve for pre-development costs - $8.1 million Impairment reserve for for-sale housing - $1.0 million Loss on sale of and impairment reserve for other assets, including corporate aircraft - $3.3 million. (3) The cumulative effect of accounting change results from the Company's adoption of SFAS No. 133, effective January 1, 2001. (4) The extraordinary item resulted from costs associated with the early extinguishment of indebtedness. (5) The Company uses the National Association of Real Estate Investment Trusts ("NAREIT") definition of FFO. Effective January 1, 2000, NAREIT amended its definition of FFO to include in FFO all non-recurring transactions, except those that are defined as extraordinary under generally accepted accounting principles ("GAAP"). The Company adopted this new definition effective January 1, 2000. FFO for any period means the Consolidated Net Income of the Company and its subsidiaries for such period excluding gains or losses from debt restructuring and sales of 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. FFO presented herein is not necessarily comparable to FFO presented by other real estate companies because not all real estate companies use the same definition. The Company's FFO is comparable to the FFO of real estate companies that use the current NAREIT definition. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Company's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's needs or ability to service indebtedness or make distributions. FFO for 1998 and 1997 has been restated to reflect the requirements of the new NAREIT definition. (6) Amount represents average economic occupancy for communities stabilized for both the current and prior respective periods. Average economic occupancy is defined as gross potential rent less vacancy losses, model expenses and bad debt divided by gross potential rent for the period, expressed as a percentage. The calculation of average economic occupancy does not include a deduction for concessions and employee discounts (average economic occupancy, taking account of these amounts, would have been 93.8% and 94.8% for the year ended December 31, 2001 and 2000, respectively). Concessions were $1,860 and $3,729 and employee discounts were $895 and $871 for the years ended December 31, 2001 and 2000, respectively. A community is considered by the Company to have achieved stabilized occupancy on the earlier to occur of (i) attainment of 95% physical occupancy on the first day of any month, or (ii) one year after completion of construction.
Post Properties, Inc. 19 Post Apartment Homes, L.P.
POST APARTMENT HOMES, L.P. (Dollars in thousands, except per unit and apartment unit data)
Post Properties, Inc. 20 Post Apartment Homes, L.P.
(1) Consists of revenue and expenses from property management and landscape services provided to properties owned by third parties. (2) Project abandonment, employee severance and impairment charges for 2001 consisted of the following: Severance cost - $3.6 million Impairment reserve for technology investments - $1.5 million Impairment reserve for pre-development costs - $8.1 million Impairment reserve for for-sale housing - $1.0 million Loss on sale of and impairment reserve for other assets, including corporate aircraft - $3.3 million. (3) The cumulative effect of accounting change results from the Company's adoption of SFAS No. 133, effective January 1, 2001. (4) The extraordinary item resulted from costs associated with the early extinguishment of indebtedness. The extraordinary item has been reduced by the portion related to the minority interest of the unitholders calculated on the basis of weighted average Units outstanding for the year. (5) The Company uses the National Association of Real Estate Investment Trusts ("NAREIT") definition of FFO. Effective January 1, 2000, NAREIT amended its definition of FFO to include in FFO all non-recurring transactions, except those that are defined as extraordinary under generally accepted accounting principles ("GAAP"). The Company adopted this new definition effective January 1, 2000. FFO for any period means the Consolidated Net Income of the Company and its subsidiaries for such period excluding gains or losses from debt restructuring and sales of 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. FFO presented herein is not necessarily comparable to FFO presented by other real estate companies because not all real estate companies use the same definition. The Company's FFO is comparable to the FFO of real estate companies that use the current NAREIT definition. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Company's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's needs or ability to service indebtedness or make distributions. FFO for 1998 and 1997 has been restated to reflect the requirements of the new NAREIT definition. (6) Amount represents average economic occupancy for communities stabilized for both the current and prior respective periods. Average economic occupancy is defined as gross potential rent less vacancy losses, model expenses and bad debt divided by gross potential rent for the period, expressed as a percentage. The calculation of average economic occupancy does not include a deduction for concessions and employee discounts (average economic occupancy, taking account of these amounts, would have been 93.8% and 94.8% for the year ended December 31, 2001 and 2000, respectively). Concessions were $1,860 and $3,729 and employee discounts were $895 and $871 for the years ended December 31, 2001 and 2000, respectively. A community is considered by the Company to have achieved stabilized occupancy on the earlier to occur of (i) attainment of 95% physical occupancy on the first day of any month, or (ii) one year after completion of construction.
Post Properties, Inc. 21 Post Apartment Homes, L.P.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousand, except apartment unit data)
OVERVIEW
The following discussion should be read in conjunction with all of the financial statements appearing elsewhere in this report. The following discussion is based primarily on the Consolidated Financial Statements of Post Properties, Inc. (the "Company") and Post Apartment Homes, L.P. (the "Operating Partnership"). Except for the effect of minority interest in the Operating Partnership, the following discussion with respect to the Company is the same for the Operating Partnership.
As of December 31, 2001, there were 41,975,447 Units outstanding, of which 36,856,559 or 87.8%, were owned by the Company and 5,118,888, or 12.2% were owned by other limited partners (including certain officers and directors of the Company). As of December 31, 2001, there were 7,700,000 preferred units outstanding, of which 4,900,000 were owned by the Company.
CRITICAL ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS
In the preparation of financial statements and in the determination of Company operating performance, the Company utilizes certain significant accounting polices and these accounting policies are discussed in Note 1 to the Company's consolidated financial statements. Also discussed in Note 1 to the consolidated financial statements are several new accounting pronouncements issued in 2001. The impact of the new pronouncements is discussed below and in the consolidated financial statements. As the Company is in the business of developing, owning and managing apartment communities, its critical accounting policies relate to cost capitalization and asset impairment evaluation.
The Company capitalizes those expenditures relating to the acquisition of new assets, the development and construction of new apartment communities, the enhancement of the value of existing assets and expenditures that substantially extend the life of existing assets. All other expenditures necessary to maintain a community in ordinary operating condition are expensed as incurred. Additionally, for new development communities, carpet, vinyl and blind replacements are expensed as incurred during the first five years (which corresponds to the estimated depreciable life). Thereafter, these replacements are capitalized. Further, the Company expenses as incurred all interior and exterior painting of communities.
The Company capitalizes interest, real estate taxes, and certain internal personnel and associated costs directly related to apartment communities under development and construction. The incremental personnel and associated costs are capitalized to the projects under development based upon the effort directly identifiable with such projects. Should the Company reduce its development activities below a range of $75 million to $150 million annually, the Company would need to either reduce its incremental personnel and associated costs related to development and construction activities or reflect such costs as current period expenses. The Company treats each unit in an apartment community separately for cost accumulation, capitalization and expense recognition purposes. Prior to the commencement of leasing activities, interest and other construction costs are capitalized and reflected on the balance sheet as construction in progress. The Company ceases the capitalization of such costs as the residential units in a community become substantially complete and available for occupancy. This results in a proration of these costs between amounts that are capitalized and expensed as the residential units in a development community become available for occupancy. In addition, prior to the completion of units, the Company expenses as incurred substantially all operating expenses (including pre-opening marketing expenses) of such communities.
The Company continually evaluates the recoverability of the carrying value of its real estate assets using the methodology prescribed in Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Factors considered by management in evaluating impairment include significant declines in property operating profits, recurring property operating losses and other significant adverse changes in general market conditions that are considered permanent in nature. If any real estate asset held for investment is considered impaired, a loss is provided to reduce the carrying value of the asset to its fair value. If a real estate asset is held for sale, any estimated loss is provided to reduce the carrying value of the asset to its fair value less costs to sell. Subsequent to the classification of assets as held for sale, no further depreciation expense is recorded.
In 2001, the Financial Accounting Standards Board issued several new accounting pronouncements, which are discussed in the following paragraphs.
Post Properties, Inc. 22 Post Apartment Homes, L.P.
SFAS No. 141, "Business Combinations", which requires all business combinations initiated after June 30, 2001 to be accounted for under the purchase method, was issued in July 2001. SFAS No. 141 supersedes APB Opinion No. 16, "Accounting for Pre-acquisition Contingencies of Purchase Enterprises", and is effective for all business combinations initiated after June 30, 2001. The adoption of SFAS No. 141 did not have a significant effect on the Company's results of operations or its financial position.
SFAS No. 142, "Goodwill and Other Intangible Assets", was issued in July 2001. Under SFAS No. 142, the amortization of goodwill or other intangible assets with indefinite lives is no longer required, but will be subject to periodic testing for impairment. SFAS No. 142 supersedes APB Opinion No. 17, "Intangible Assets". The Company will implement SFAS No. 142 on January 1, 2002. The Company believes the provisions of SFAS No. 142 will not have a significant effect on its results of operations or its financial position.
SFAS No. 143, "Account for Obligations Associated with Retirement of Long-Lived Assets", was issued in August 2001. SFAS No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement costs. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS No. 143 is effective in fiscal years beginning after June 15, 2002. The Company believes the provisions of SFAS No. 143 will not have a significant effect on its results of operations or its financial position.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," that replaces SFAS No. 121 was issued in October 2001. SFAS No. 144 requires that long-lived assets be measured at the lower of their carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and the Company will implement the provisions of SFAS No. 144 on January 1, 2002.
Under both SFAS No. 121 and 144, real estate assets designated as held for sale are stated at their fair value less costs to sell. The Company classifies real estate as held for sale when its internal investment committee approves the sale and the Company has commenced an active program to sell the assets. Subsequent to this classification, no further depreciation is recorded on the assets. The operating results of real estate assets held for sale were included in continuing operations. Upon the implementation of SFAS No. 144 in 2002, the operating results of real estate assets held for sale and real estate assets sold will be included in discontinued operations in the consolidated statement of operations. The Company believes the provisions of SFAS No. 144 will not have a significant effect on the Company's net results of operations or its financial position.
RESULTS OF OPERATIONS
The following discussion of results of operations should be read in conjunction with the consolidated statements of operations and the accompanying selected financial data.
COMPARISON OF YEAR ENDED DECEMBER 31, 2001 TO YEAR ENDED DECEMBER 31, 2000
The Operating Partnership reported net income available to common unitholders of $85,269 and $100,336 for the years ended December 31, 2001 and 2000, respectively, and the Company reported net income available to common shareholders of $75,159 and $88,645 for the years ended December 31, 2001 and 2000, respectively. The decrease in Company net income available to common shareholders of $13,486 from 2000 to 2001 was primarily related to project abandonment, employee severance and impairment charges of $17,450 ($15,316 net of minority interest). The Company's asset sales in 2001 generated gains which increased by $20,734 ($18,276 net of minority interest) due to an increase in sales volume as well as the mix of assets sold as compared to 2000. These increased gains were offset by the weaker operating performance of fully stabilized communities (see below), slower lease-up of new development communities, the dilutive impact of the Company's fully implemented asset sale and capital reinvestment program and increased general and administrative expenses.
Rental revenue increased $2,147 or 0.6% from 2000 to 2001 primarily due to the $2,496 or 1.0% growth in revenues from fully stabilized communities discussed further below. The rental revenue increases from the Company's newly stabilized and lease-up properties of $32,973 was offset by the revenue reduction of $33,224, from assets held for sale and sold under the Company's asset sales and capital recycling program. Property operating and maintenance expenses (exclusive of depreciation and amortization) increased $9,281 or 7.1% primarily due to the $8,216 or 9.0% increase at fully stabilized and newly stabilized properties.
Post Properties, Inc. 23 Post Apartment Homes, L.P.
Revenues in excess of specified expenses from third party services, principally landscape and property management, decreased $1,092 or 50.6% from 2000 to 2001 primarily due to a decrease in earnings from landscape services. This decrease was due to a reduction in new installation volume resulting from a slow down in commercial construction activity and due to the sale of the landscape operation to its management team effective October 31, 2001.
In addition to the sale of third party landscape business, the Company also sold its third party property management business to its respective management team on December 31, 2001. These sales were part of the Company's strategy to focus on its core business of owning, developing and managing multifamily communities. As the sales were financed 100% by the Company, they were not recorded as sales under generally accepted accounting principles. The Company financed these transactions over five years with two one-year renewal options. The purchase money notes bear interest at 9% per annum. As more fully discussed in Note 8 to the consolidated financial statements, full sales recognition will not occur until the Company receives an adequate down payment on the notes. The estimated loss of $452 on the landscape business sale was included in the asset impairment charge in 2001. A gain of $591 was deferred on the sale of the property management business and will be recognized when the criteria for sale recognition occurs (expected to be in 2002). These operations generated revenues in excess of specified expenses of $1,065 that will not occur in 2002.
Depreciation expense increased $5,065 or 7.1% from 2000 to 2001 primarily as a result of the increase in operating depreciable assets in 2001.
Interest expense increased $7,627 or 15.2% from 2000 to 2001 primarily due to increased borrowings and a decrease in the amount of interest capitalized to a reduced amount of communities under construction between years.
General and administrative expenses increased $3,679 or 36.5% from 2000 to 2001 primarily due to reduced capitalization of overhead on a reduced amount of communities under construction, increased insurance costs and technology connectivity costs.
The net gain on sale of assets in 2001 resulted from the sale of six communities, one commercial property and five tracts of land, adjusted by the impact of write-downs to fair value less costs to sell of assets currently held for sale.
COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO YEAR ENDED DECEMBER 31, 1999
The Operating Partnership reported net income available to common unitholders of $100,336 and $105,177 for the years ended December 31, 2000 and 1999, respectively, and the Company reported net income available to common shareholder of $88,645 and $92,642 for the years ended December 31, 2000 and 1999, respectively. The decrease in Company net income available to common shareholders of $3,997 from 1999 to 2000 was primarily related to project abandonment, employee severance and asset impairment changes of $9,365 ($8,277 net of minority interest) as discussed below.
Rental revenues increased $47,198 or 14.8% due to the $13,950 or 5.8% growth in revenues from fully stabilized communities discussed further below and due to the increase from newly stabilized and lease-up properties of $37,254. These increases were only partially offset by the impact of assets held for sale or sold under the Company's asset sales and capital recycling program which was implemented in 2000. Property operating and maintenance expenses (exclusive of depreciation and amortization) increased $18,197 or 16.1% largely due to the increase of the operating property portfolio from the lease-up of newly stabilized and lease-up properties.
Revenues in excess of specified expenses (exclusive of depreciation and amortization) from third party services increased by $500 or 30.2% due to increased profits from the property management business resulting from an increase in the average number of units managed.
Depreciation expense increased $13,100 or 22.6% from 1999 to 2000 primarily as a result of an increase in operating depreciable property from the completion of development properties, additional leasehold improvements and technology expenditures.
Interest expense increased $17,111 or 51.6% from 1999 to 2000 primarily due to significantly increased borrowings used to fund the growth in both the operating and development property portfolios.
General and administrative expenses increased $2,278 or 29.3% from 1999 to 2000 primarily due to increased personnel costs at a rate consistent with the overall growth of the Company.
Post Properties, Inc. 24 Post Apartment Homes, L.P.
The net gain on sale of assets in 2000 resulted from the sale of eight communities, adjusted by the impact of write downs to fair market value of assets held for sale. The net loss on sale of assets in 1999 resulted from the sale of one community and two tracts of land.
PROJECT ABANDONMENT, EMPLOYEE SEVERANCE AND IMPAIRMENT CHARGES
The Company recorded project impairment and abandonment, employee severance and asset impairment charges for the years ended December 31, 2001 and 2000. The charges are summarized as follows:
In the fourth quarter of 2001, the Company recorded charges totaling $17,450. These charges, precipitated by the sharp decline in economic and market conditions, reflect management's decision to focus its business and new development strategy on fewer markets, to focus on its core business of owning, developing and managing multifamily real estate assets and to do so with a smaller workforce and lower overhead expenses. The project impairment charge of $8,122 represents reserves on certain predevelopment and transaction pursuit costs in markets the Company will no longer pursue for development opportunities and for certain projects that will no longer be pursued due to economic and market conditions. The employee severance charge of $3,560 is primarily for severance costs related to approximately a 100 person senior management and staff workforce reduction plan initiated and completed in the fourth quarter of 2001. The asset impairment and disposition charge includes a loss of $2,831 related to the disposition of the Company's corporate aircraft, a loss of $452 on the sale of the Company's third party landscape business discussed more fully below, impairment charges of $1,000 related to the Company's exit from the for-sale housing business in all markets, and the write-down to estimated market value of certain internet and technology investments of $1,485.
At December 31, 2001, approximately $3,632 of these charges, primarily employee severance costs, remained as an accrued liability on the consolidated balance sheet. These amounts are expected to be paid in 2002.
In the fourth quarter of 2001, the Company sold substantially all of the net assets of Post Landscape Group, Inc., a subsidiary entity that provided landscape maintenance, design and installation services to third parties, and RAM Partners, Inc., a separate subsidiary entity that managed apartment communities for third parties. These businesses were sold to members of the respective former management teams of the subsidiaries. The Company financed 100% of the sales price of $5,767 (adjusted for working capital transfers at closing) through purchase money notes with a fixed interest rate of 9%. The notes require periodic interest, annual principal and final balloon principal payments in 2006. The notes can be extended for two one-year periods. Under generally accepted accounting principles, the transactions have not been recorded as sales at December 31, 2001, and will not be recorded as sales until the conditions for sale recognition, primarily the receipt of an adequate down payment on the notes, are met. Until these transactions are recognized as sales, the book value of the assets and liabilities of these business are included in the Company's consolidated balance sheet. Any collections under the notes will reduce the carrying value of the assets. The sale of the Post Landscape Group resulted in a loss of $452. Under generally accepted accounting principles, this loss was recognized in 2001 and included in the project abandonment, employee severance and impairment charges discussed above. The sale of RAM Partners will result in a gain of approximately $591, which will be recognized when the conditions for full sale recognition are met (expected in 2002).
In the fourth quarter of 2000, the Company recorded charges of $9,365. These charges reflect management's decision to restrict its development activities to fewer markets, refine its development investment and for-sale housing strategies and make changes in its executive management team. Project abandonment charges totaling $4,389 related to the write off of predevelopment and pursuit costs in markets in which the Company will no longer pursue development opportunities and on certain proposed development deals not consistent with management's revised development strategy. Employee severance charges related to the termination costs of four executive positions and five staff personnel in the Company's Dallas, Texas regional office. The asset impairment charge of $1,910 includes a charge of $1,503 related to the write off of the Company's investment in a high speed internet provider that filed for bankruptcy protection and a charge of $407 related to the exit from the for-sale housing business in certain markets. As of December 31, 2001, all of the 2000 charges had been paid.
Post Properties, Inc. 25 Post Apartment Homes, L.P.
COMMUNITY OPERATIONS/SEGMENT PERFORMANCE
The Company's net income is generated primarily from the operation of its apartment communities. For purposes of evaluating comparative operating performance, the Company categorizes its operating communities based on the period each community reaches stabilized occupancy. A community is generally considered by the Company to have achieved stabilized occupancy on the earlier to occur of (i) attainment of 95% physical occupancy on the first day of any month or (ii) one year after completion of construction.
At December 31, 2001, the Company's portfolio of apartment communities consisted of the following: (i) 65 communities that were completed and stabilized for all of the current and prior year, (ii) ten communities that achieved full stabilization during 2000, (iii) six communities and an addition to an existing community which reached stabilization during 2001, (iv) 12 communities and additions to three existing communities currently in the development or lease-up stage and (v) two stabilized communities classified as held for sale.
The Company has adopted an accounting policy related to communities in the lease-up stage whereby substantially all operating expenses (including pre-opening marketing expenses) are expensed as incurred. During the lease-up phase, the sum of interest expense on completed units and other operating expenses (including pre-opening marketing expenses) will initially exceed rental revenues, resulting in a "lease-up deficit," which continues until such time as rental revenues exceed such expenses. Lease up deficits for the years ended December 31, 2001, 2000 and 1999 were $3,173, $2,665 and $2,798, respectively.
In order to evaluate the operating performance of its communities, the Company has presented financial information which summarizes the revenue in excess of specified expense on a comparative basis for all of its operating communities combined and for fully stabilized communities.
ALL OPERATING COMMUNITIES
The operating performance for all of the Company's apartment communities combined for the years ended December 31, 2001, 2000 and 1999 is summarized as follows:
(1) Communities which reached stabilization prior to January 1, 2000.
(2) Communities in the "construction", "development" or "lease-up" stage during 2001 and, therefore, not considered fully stabilized for all of the periods presented.
(3) Includes two communities in Florida and one commercial property in Texas.
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(4) Includes results from six communities containing 2,799 units and one commercial property sold in 2001 and results from eight communities containing 1,984 units sold in 2000 for the applicable periods presented.
(5) Other revenue includes revenue on furnished apartment rentals above the unfurnished rental rates and any revenue not directly related to property operations.
(6) Other expenses includes certain indirect central office operating expenses related to management, grounds maintenance, and costs associated with furnished apartment rentals.
(7) In addition to those expenses which relate to property operations, the Company incurs recurring and non-recurring expenditures relating to acquiring and developing new assets, materially enhancing the value of an existing asset, or substantially extending the useful life of an existing asset, all of which are capitalized.
For the year ended December 31, 2001, rental and other revenue decreased $206 or 0.1% compared to 2000. The revenue increase from the completion and lease-up of new development communities was offset by the revenue reduction from assets sold in 2001 and 2000 under the Company's asset sales and capital recycling program. The growth in revenue from fully stabilized communities slowed to 1.0% between years as a result of declining average occupancy and declining rental rate growth in the second half of 2001. Property operating and maintenance expenses (exclusive of depreciation and amortization) increased $9,281 or 7.1% from 2000 to 2001 primarily due to an increase in expenses at fully stabilized communities and communities stabilized in 2000 of $8,216 resulting from increased personnel costs, real estate taxes and insurance. For the year ended December 31, 2001, recurring capital expenditures increased $1,284, or 14.0% compared to the prior year, primarily due to increased roof replacements, appliance purchases and amenities enhancements.
For the year ended December 31, 2000, rental and other revenue increased $49,984 or 15.0% compared to 1999, primarily as a result of the completion and lease-up of new communities and increased rental rates at fully stabilized communities. Property maintenance and operating expenses (exclusive of depreciation and amortization) increased from 1999 to 2000 by $18,197 or 16.1% primarily due to the financial impact of placing an average of an additional 2,418 apartment units in service between years. For the year ended December 31, 2000, recurring capital expenditures increased $516, or 6.0%, compared to the prior year, primarily due to additional units place in service and additional landscape improvements at the communities.
FULLY STABILIZED COMMUNITIES
The Company defines fully stabilized communities as those which have reached stabilization prior to the beginning of the previous calendar year. At December 31, 2001, the fully stabilized portfolio of 65 communities with 22,505 units includes 34 communities with 13,279 units (59%) located in Atlanta, Georgia, 18 communities with 4,042 units (18%) in Dallas, Texas, eight communities with 3,687 units (16%) located in Tampa and Orlando, Florida and five communities with 1,497 units (7%) located in other markets. The operating performance of these communities is summarized as follows:
(1) Communities which reached stabilization prior to January 1, 2000. (2) In addition to those expenses which relate to property operations, the Company incurs recurring and non-recurring expenditures relating to acquiring new assets, materially enhancing the value of an existing asset, or substantially extending the useful life of an existing asset, all of which are capitalized. For the years ended December 31, 2001, 2000 and 1999, recurring expenditures were $9,014, $7,328 and $7,048, or $401, $326 and $313 on a per unit basis, respectively. (3) Average economic occupancy is defined as gross potential rent less vacancy losses, model expenses and bad debt divided by gross potential rent for the period, expressed as a percentage. The calculation of average economic occupancy does not include a deduction for concessions and employee discounts. (Average economic occupancy, taking account of these amounts would have been 93.8%, 94.8% and 94.1% for the years ended December 31, 2001, 2000 and 1999, respectively). Concessions were $1,860, $3,729 and $3,217 and employee discounts were $895, $871 and $678 for the years ended December 31, 2001, 2000 and 1999, respectively. (4) Average monthly rental rate is defined as the average of the gross actual rental rates for leased units and the average of the anticipated rental rates for unoccupied units.
For the year ended December 31, 2001, rental and other revenue increased $2,496 or 1.0% compared to 2000. Gross revenue less concessions increased by approximately $7,174 or 2.9% between years. This increase was partially offset by an increased
Post Properties, Inc. 27 Post Apartment Homes, L.P.
vacancy loss of $4,684 primarily resulting from the decrease in weighted average occupancy from 96.6% in 2000 to 94.9% in 2001. The Company's rental and other revenue growth between years began to slow in the third quarter of 2001 and showed a decline of $1,846 or 2.9% in the fourth quarter as average occupancies declined and rental rate growth slowed. The decline in the second half of 2001 reflects the sharp decline in economic and market activity across most of the Company's markets. This was especially true in the Company's primary market, Atlanta, Georgia, where new job growth turned negative for the first time in many years as many major employers began downsizing their workforces in response to a national recession.
As the Company enters into the first quarter of 2002, average economic occupancy for the stabilized portfolio has decreased from 93.3% in the fourth quarter of 2001 to approximately 91.0% in the first two months of 2000 further reflecting the impact of declining economic and market conditions in the national economy and most of our major markets, particularly Atlanta, Georgia. If market conditions do not improve in 2002, stabilized property revenues and revenues in excess of specified expense will decrease in the 2% to 5% range when compared to 2001.
Property operating maintenance expense (exclusive of depreciation and amortization) increased $5,016 or 6.4% from 2000 to 2001 primarily due to increased personnel costs of $1,471 or 6.9%, increased repairs and maintenance expenses of $1,061 or 11.3% and increased property insurance premiums of $1,614 or 142.4%. Insurance costs increased due to across the board increases in property and liability premiums primarily due to favorably low rate structure the Company enjoyed in prior years and to a lesser extent unfavorable claims experience. Personnel costs increased due to annual salary increases and additional maintenance personnel based on an expectation of higher average occupancies and increased rental rates as the Company entered into 2001. Property repairs and maintenance reflects increased unit turnkey expenses as unit vacancies increased between years and an increase in expensed exterior painting between years.
For 2002, the Company will have additional insurance premium increases of approximately 70% as a result of the effects on the insurance markets of the terrorist attacks in September 2001. However, through certain staff realignments and reductions and a more intense focus on expense control, the Company believes the increase in property operating and maintenance expenses for 2002 will be in the 2% to 4% range.
For the year ended December 31, 2000, rental and other revenue increased $13,950 or 5.8% compared to 1999 due to both rental rate growth and average occupancy increases. Property operating and maintenance expenses (exclusive of depreciation and amortization) increased $4,333 or 5.9% from 1999 to 2000 primarily due to increased personnel costs of $1,905 or 9.8% and increased real estate tax expenses of $2,021 or 8.1%. Personnel costs increased due to normal annual salary increases and additional staff necessary to service the portfolio averaging over 96% occupancy in 2000 and due to an increase in employee discounts between years. Real estate taxes increased due primarily to a 5% increase in tax rates in Dallas, Texas, and to valuation increases of over 10% at our Tampa, Florida properties.
LIQUIDITY AND CAPITAL RESOURCES
The discussion in this Liquidity and Capital Resources section is the same for the Company and the Operating partnership, except that all indebtedness described herein has been incurred by the Operating Partnership.
The Company's net cash provided by operating activities decreased from $185,073 in 2000 to $161,564 in 2001 primarily due to lower net income (before depreciation and gain on sale of assets), resulting from the larger project abandonment, employee severance and impairment charges, weaker operating performance of the Company's fully stabilized properties and the dilutive impact of the Company's asset sale and capital recycling program. Net cash provided by operating activities increased from $153,038 in 1999 to $185,073 in 2000, primarily due changes in working capital and an increase in net income before depreciation.
Net cash used in investing activities decreased from $255,986 in 2000 to $51,213 in 2001 primarily due to greater proceeds from the sale of apartment communities and other property and reduced spending on construction and acquisition of real estate assets. Net cash used in investing activities decreased from $317,960 in 1999 to $255,986 in 2000 primarily due to increased proceeds from the sale of apartment communities partially offset by increased spending on construction and acquisition of real estate assets.
Net cash provided by (used in) financing activities decreased from $149,638 in 1999 to $72,502 in 2000 and to $(113,007) in 2001 primarily due to increased treasury stock purchases and reduced net borrowings between years.
Post Properties, Inc. 28 Post Apartment Homes, L.P.
Since 1993, the Company has elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). It is management's current intent that the Company will continue to operate as a REIT in 2002. As a REIT, the Company is subject to a number of organizational and operating requirements, including a requirement to distribute 90% of its taxable income to its shareholders. As a REIT, the Company generally will not be subject to federal income taxes on its taxable income.
In prior years, the Company met its short-term liquidity requirement of funding the payment of its current level of quarterly dividends to shareholders from its net cash flow provided by operating activities, less its annual recurring and nonrecurring property and corporate capital expenditures. Beginning in the fourth quarter of 2001, the Company's net cash flow from operations reduced by annual capital expenditures discussed above was not sufficient to fully fund the Company's current level of dividend payments to common shareholders. The Company's net cash flow from operations continues to be sufficient to meet the dividend requirements to maintain its REIT status under the Code. The additional funding required to pay the current dividends was obtained through a combination of line of credit borrowings and proceeds from asset sales. The factors that have lead to this condition are the decline in economic and market conditions in the fourth quarter in the Company's major markets resulting in lower cash flow from its operating property portfolio, the slower lease-up of its existing development community portfolio and the short-term negative cash flow impact of funding its current development portfolio through the sale of operating real estate assets.
Management believes that these factors will remain present as the Company moves into 2002, resulting in the need to fund a portion of its current level of dividend payments primarily through proceeds from asset sales. Depending on market conditions, the Company may need to fund dividends ranging from $8,000 to $15,000 from these sources in 2002. Management has indicated that it intends to maintain the quarterly dividend to common shareholders at its current level of $0.78 per share, as the Company has adequate financing capability to fund the dividends. Additionally, it is management's belief that as economic and market conditions recover in future periods operating cash flow will increase and be adequate to fund the current level of dividend payments.
Management expects the Company to meet its new construction and development and certain of its other long-term liquidity requirements, including the contractual obligations detailed below, and possible land and property acquisitions through the sale of operating properties and through long-term secured and unsecured borrowings. Management believes the Company has adequate borrowing capacity and accessibility to real estate sales markets to fund these requirements. Additionally, the Company began to utilize equity joint ventures as a means of raising capital and reducing the size and exposure of its development property pipeline. During 2001, the Company received equity capital through the joint ventures totaling $18,082. The Company plans to continue to use joint venture arrangements in 2002.
A summary of the Company's future contractual obligations related to long-term debt, non-cancelable operating leases and other obligations listed and discussed below at December 31, 2001, were as follows:
(1) Includes six ground leases relating to apartment communities owned by the Company. (2) At December 31, 2001, the Company is obligated to fund approximately $34,252 of construction financing and $9,736 of equity contributions to unconsolidated entities. In addition, the Company has guaranteed the timely construction completion and the final cost of certain construction cost categories of the underlying real estate projects. The maximum exposure under the cost guarantee provisions of these arrangements is approximately $14,000. The Company estimates its current funding obligation under these cost guarantee provisions to be approximately $900. Further, the Company believes the projects will be completed on a timely basis, thus fully mitigating its cost exposure under the completion guarantee.
In addition to these contractual obligations, the Company has development projects in progress that will be completed over the next twelve to eighteen months. At December 31, 2001, the Company's share of the estimated future cash expenditures to complete these projects will approximate $200,000. As previously discussed, the Company intends to use the proceeds from sale of operating properties as the primary source of capital to fund these future development expenditures. The Company began an active asset sale and capital recycling program in 2000 as the primary means to fund its on-going development community program. Total funds raised in 2001 and 2000 were $220,122 and $157,265, respectively.
Post Properties, Inc. 29 Post Apartment Homes, L.P.
In 2001, the Company sold six apartment communities containing 2,799 units for net proceeds of approximately $210,443. The communities sold were located in Atlanta, Georgia, Dallas Texas and Nashville, Tennessee. Additionally, the Company sold land parcels in Dallas, Texas, Denver, Colorado and Charlotte, North Carolina and a commercial property in Dallas, Texas for aggregate net proceeds of $9,679. These sales resulted in net gains of approximately $16,365. For the year ended December 31, 2001, the aggregate net gain on the sale of assets of $23,942 included the impact of the estimated net losses totaling $11,490 on the write down to fair value of assets designated as held for sale at December 31, 2001 and excluded realized losses totaling $19,067 related to assets written down to their estimated fair value at December 31, 2000.
In 2000, the Company sold eight apartment communities containing 1,984 units for net proceeds of approximately $157,265, resulting in net gains of approximately $24,266. The communities sold were located in Atlanta, Georgia, Jackson, Mississippi and Nashville, Tennessee. For the year ended December 31, 2000, the aggregate net gain on the sale of assets of $3,208 included the estimated net losses totaling $21,058 on the write down to fair value of assets designated as held for sale at December 31, 2000.
At December 31, 2001, the Company had available credit facility borrowing capacity of approximately $359,000 under its existing credit facilities. The Company's primary credit facility with total capacity of $320,000 matures in 2004 while a second incremental credit facility of $185,000 renews annually. Management currently anticipates the renewal of the incremental credit facility although the total capacity will likely be reduced as a result of the decrease in the Company's development pipeline. The Company has adequate capacity under these facilities to execute its 2002 business plan without regard to a significant level of asset sales or other secured and unsecured debt financings.
In the first quarter of 2002, the Company's unsecured public debt was downgraded from Baa1 to Baa2 by Moody's Investor Services and from BBB+ to BBB by Standard & Poors. This change in the investment credit rating of the Company's debt increased the pricing of its syndicated lines of credit by 10 to 12.5 basis points and may increase the pricing of new issuances of unsecured debt. In addition, certain of the financial covenants under the Company's syndicated line of credit are tied to maintaining an investment grade credit rating. After the recent downgrade, the Company remains an investment grade rated company by both Moody's Investors Services and Standard & Poors. Management does not anticipate this downgrade to affect the Company's ability to obtain the anticipated level of debt financing. Should the Company not maintain its investment credit rating its total dividend payout, exclusive of the portion of the dividend attributable to capital gains from asset sales up to $30,000, would be limited to 95% versus 100% of Consolidated Income Available for Distribution, as defined. Management believes the Company's current business plan and financing strategy are consistent with the fundamentals of maintaining its investment grade ratings.
UNSECURED LINES OF CREDIT
The Company utilizes a $320,000 three-year syndicated revolving line of credit (the "Revolver"), for its short-term financing. At December 31, 2001, the stated interest rate for the Revolver was LIBOR plus 0.75% or prime minus 0.25%. Subsequent to year end, the stated rate increased to LIBOR plus 0.85% as a result of credit rating agency downgrade on the Company's senior unsecured debt. The Revolver provides for the rate to be adjusted up or down based on changes in the credit ratings on the Company's senior unsecured debt. The Revolver also includes a money market competitive bid option for short-term funds up to $160,000 at rates below the stated line rate. The credit agreement for the Revolver contains customary representations, covenants and events of default, including covenants which restrict the ability of the Operating Partnership to make distributions, in excess of stated amounts, which in turn restrict the discretion of the Company to declare and pay dividends. In general, during any fiscal year the Operating Partnership may only distribute up to 100% of the Operating Partnership's consolidated income available for distribution (as defined in the credit agreement) exclusive of distributions of up to $30,000 of capital gains for such year. The credit agreement contains exceptions to these limitations to allow the Operating Partnership to make distributions necessary to allow the Company to maintain its status as a REIT. The Company does not anticipate that this covenant will adversely affect the ability of the Operating Partnership to make distributions, or the Company to declare dividends, under the Company's current dividend level. The Revolver matures in April 2004.
The Company also has in place an additional $185,000 line of credit facility for general corporate purposes. This line matures in April 2002 and carries terms substantially equal to the Revolver. Management expects the Company to renew and extend this credit facility, although the total capacity and terms may vary. There were no outstanding borrowings under this facility at December 31, 2001.
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Additionally, the Company has a $20,000 unsecured line of credit with Wachovia Bank of Georgia, N.A. (the "Cash Management Line"). The Cash Management Line bears interest at LIBOR plus 0.75% or prime minus .25% and matures in February, 2003. Management believes the Cash Management Line will be renewed at maturity with similar terms.
SENIOR AND MEDIUM TERM NOTES
In 2001, the Company issued $50,000 of 6.71% senior unsecured notes due in 2006. The net proceeds from the notes were used to repay outstanding indebtedness. In 2001, the Company repaid the outstanding balance of one medium term note issuance totaling $37,000 and one senior note issuance totaling $30,000 at their scheduled maturing dates. All of the unsecured notes are subject to certain covenants, including those governing the Company's total leverage.
STOCK REPURCHASE PROGRAM
The Company's Board of Directors has approved the purchase of up to $200,000 of the Company's common stock. In the fourth quarter of 2000, the Company began repurchasing shares of its common stock in accordance with the announced stock repurchase program using funds from operating cash flow and the sale of properties. Purchases will be made from time to time in the open market and it is expected that funding of the program will come primarily from the proceeds from asset sales. For the year ended December 31, 2001, the Company repurchased 2,370,100 shares of common stock at a total cost of $87,506. Treasury stock activity for the year ended December 31, 2001 was as follows (in thousands dollars):
Additionally, during the fourth quarter of 2001, the Company repurchased 100,000 shares of its preferred stock for $5,100. The stock repurchase activity in 2001 and 2000 was consistent with the Company's stated objective to acquire stock when the price per share is below the Company's internal estimate of the fair market value of its net assets. Management has indicated it will be opportunistic with respect to additional share repurchases and intends to finance additional repurchases with asset sale proceeds rather than additional borrowings.
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SCHEDULE OF INDEBTEDNESS
The following table reflects the Company's indebtedness at December 31, 2001 and 2000:
(1) All outstanding indebtedness can be prepaid at any time, subject to certain prepayment penalties. (2) Contains $100,000 of Mandatory Par Put Remarketed Securities. The annual interest rate on these securities to 2005 (the "Remarketing Date") is 6.85%. On the Remarketing Date, they are subject to mandatory tender for remarketing. (3) Represents stated rate. Stated rate increased to LIBOR plus 0.85% in 2002. At December 31, 2001, the outstanding balance of the Revolver consisted of "money market" loans with an average interest rate of 2.46%. (4) This loan is interest free for the first three years, with interest at 5.00% thereafter. (5) In 2000, interest rate was fixed at 6.975%, inclusive of credit enhancement and other fees, to 2009 through an interest rate swap arrangement. (6) This note bears interest at 6.50% with an effective rate of 7.30%. (7) FNMA credit enhanced bond indebtedness. Interest based on FNMA "AAA" tax exempt rate plus credit enhancement and other fees of 0.639%. Interest rate represents rate at December 31, 2001 before credit enhancements. The Company has outstanding interest rate cap arrangements that limit the Company's exposure to increases in the base interest rate to 5%.
CAPITALIZATION OF FIXED ASSETS AND COMMUNITY IMPROVEMENTS
The Company has established a policy of capitalizing those expenditures relating to acquiring new assets, materially enhancing the value of an existing asset, or substantially extending the useful life of an existing asset. All expenditures necessary to maintain a community in ordinary operating condition are expensed as incurred. For new development communities carpet replacements are expensed as incurred during the first five years (which corresponds to the estimated depreciable life). Thereafter, carpet replacements are capitalized.
Post Properties, Inc. 32 Post Apartment Homes, L.P.
Acquisition of assets and community improvement expenditures for the years ended December 31, 2001 and 2000 are summarized as follows:
INFLATION
Substantially all of the leases at the Communities allow, at the time of renewal, for adjustments in the rent payable thereunder, and thus may enable the Company to seek increases in rents. The substantial majority of these leases are for one year or less and the remaining leases are for up to two years. At the expiration of a lease term, the Company's lease agreements provide that the term will be extended unless either the Company or the lessee gives at least sixty (60) days written notice of termination; in addition, the Company's policy permits the earlier termination of a lease by a lessee upon thirty (30) days written notice to the Company and the payment of one month's additional rent as compensation for early termination. The short-term nature of these leases generally serves to reduce the risk to the Company of the adverse effect of inflation.
FUNDS FROM OPERATIONS AND CASH AVAILABLE FOR DISTRIBUTION
Historical Funds from Operations The Company considers funds from operations ("FFO") a useful measure of performance of an equity REIT. FFO is defined to mean net income available to common shareholders determined in accordance with GAAP, excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real estate assets, and after adjustment for unconsolidated partnerships and joint ventures. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Company's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's needs. Cash available for distribution ("CAD") is defined as FFO less capital expenditures funded by operations and loan amortization payments. The Company believes that in order to facilitate a clear understanding of the consolidated historical operating results of the Company, FFO and CAD should be examined in conjunction with net income as presented in the consolidated financial statements and data included elsewhere in this report.
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FFO and CAD for the years ended December 31, 2001, 2000 and 1999 presented on a historical basis are summarized in the following table:
Calculation of Funds from Operations and Cash Available for Distribution
(1) The Company uses the National Association of Real Estate Investment Trusts ("NAREIT") definition of FFO. Effective January 1, 2000, NAREIT amended its definition of FFO to include in FFO all non-recurring transactions, except those that are defined as extraordinary under generally accepted accounting principles ("GAAP"). The Company adopted this new definition effective January 1, 2000. FFO for any period means the Consolidated Net Income of the Company and its subsidiaries for such period excluding gains or losses from debt restructuring and sales of 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. FFO presented herein is not necessarily comparable to FFO presented by other real estate companies because not all real estate companies use the same definition. The Company's FFO is comparable to the FFO of real estate companies that use the current NAREIT definition. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Company's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's needs or ability to service indebtedness or make distributions.
(2) Recurring capital expenditures consisted primarily of $2,935, $2,890 and $2,864 of carpet replacement and $7,506, $6,267 and $5,777 of other community additions and improvements to existing communities for the years ended December 31, 2001, 2000 and 1999, respectively. Since the Company does not add back the depreciation of non-real estate assets in its calculation of FFO, capital expenditures of $3,021, $3,441 and $6,811 are excluded from the calculation of CAD for the years ended December 31, 2001, 2000 and 1999, respectively.
(3) Non-recurring capital expenditures consisted of the additions of vehicle access control gates to communities of $749, $403 and $794 and other community additions and improvements of $1,786, $5,173 and $2,177 for the years ended December 31, 2001, 2000 and 1999, respectively.
(4) Revenue generating capital expenditures included major renovations of communities in the amount of $4,019, $6,638 and $7,826 for the years ended December 31, 2001, 2000 and 1999, respectively, and sub-metering of water service to communities in the amounts of $207, $32 and $185 for the years ended December 31, 2001, 2000 and 1999, respectively.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made in this report, and other written or oral statements made by or on behalf of the Company, may constitute "forward-looking statements" within the meaning of the federal securities laws. Statements regarding future events and developments and the Company's future performance, as well as management's expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. Examples of such statements in this report include our expectations with regard to net operating income and funds from operations for 2002, our expectations with regard to occupancy levels and rent growth, our expectations with regard to our dividend payments, our ability to meet new construction, development and other long-term liquidity requirements, and our ability to execute asset sales in connection with our asset sale and capital recycling program. All forward-looking statements are subject to certain risks and uncertainties that could cause actual events to differ materially from those projected. Management believes that these forward-looking statements are reasonable; however, you should not place undue reliance on such statements. These statements are based on current expectations and speak only as of the date of such statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise. Additional information concerning the risk and uncertainties listed above, and other factors that you may wish to consider, is contained elsewhere in the Company's filings with the Securities and Exchange Commission.
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The following are some of the factors that could cause the Company's actual results to differ materially from the expected results described in the Company's forward-looking statements:
- - future local and national economic conditions, including changes in job growth, interest rates, the availability of financing and other factors; - - demand for apartments in the Company's markets and the effect on occupancy and rental rates; - - the impact of competition, on the Company's business, including competition for tenants and development locations; - - the Company's ability to obtain financing or self fund the development of additional apartment communities; - - the uncertainties associated with the Company's current real estate development, including actual costs exceeding the Company's budgets or development periods exceeding expectations; - - conditions affecting ownership of residential real estate and general conditions in the multi-family residential real estate market; - - the effects of changes in accounting policies and other regulatory matters detailed in the Company's filings with the Securities and Exchange Commission and uncertainties of litigation; and - - the Company's ability to continue to qualify as a real estate investment trust under the Code.
Post Properties, Inc. 35 Post Apartment Homes, L.P.
ITEM 7A.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The Company's primary market risk exposure is interest rate risk. At December 31, 2001, the Company had $293,402 of variable rate debt tied to LIBOR. In addition, the Company had $235,880 in variable tax-exempt debt with interest based the FNMA "AAA" tax exempt rate.. In addition, the Company has interest rate risk associated with fixed rate debt at maturity. The discussion in this Interest Rate Sensitivity section is the same for the Company and the Operating Partnership, except that all indebtedness described herein has been incurred by the Operating Partnership.
Management has and will continue to manage interest rate risk as follows:
- - maintain a conservative ratio of fixed rate, long-term debt to total debt such that variable rate exposure is kept at an acceptable level; - - fix certain long-term variable rate debt through the use of interest rate swaps or interest rate caps with appropriately matching maturities; - - use treasury locks where appropriate to fix rates on anticipated debt transactions, and - - take advantage of favorable market conditions for long-term debt and/or equity.
Management uses various financial models and advisors to achieve these objectives.
The table below provides information about the Company's derivative financial instruments and other financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swap and cap arrangements, the table presents notional amounts and weighted average interest rates by (expected) contractual maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based upon implied forward rates in the yield curve at the reporting date. The information is presented in U.S. dollar equivalents, which is the Company's reporting currency.
(1) Interest on these debt instruments is based on LIBOR ranging from LIBOR plus 0.75% to 0.85% above LIBOR. At December 31, 2001, the LIBOR rate was 1.88%. See Schedule of indebtedness in Management's Discussion and Analysis for rates on individual debt instruments. (2) Assumes the Company's Revolver and Cash Management Line are repaid at the maturity date. Management believes these lines will be renewed at maturity with similar terms. (3) In December 2000, the Company entered into a swap transaction that fixed the rate on the note at 6.975%, inclusive of credit enhancement and other fees, from January 1, 2001 through July 31, 2009. (4) At December 31, 2001, the FNMA "AAA" tax exempt rate was 1.65%. Interest on these debt instruments is equal to the FNMA "AAA" tax exempt rate plus credit enhancement and other fees of 0.639%. The Company has purchased an interest rate cap that limits the Company's exposure to increases in the base rate to 5.00%.
Post Properties, Inc. 36 Post Apartment Homes, L.P.
As more fully described in Note 1 to the consolidated financial statements, the interest rate swap and cap arrangements are carried on the consolidated sheet at the fair value shown above in accordance with SFAS No. 133, as amended. If interest rates under the Company's floating rate LIBOR-based and tax-exempt borrowings, in excess of the $102,200 FNMA borrowings effectively converted to fixed rates discussed above, fluctuated by 1.0%, interest costs to the Company, based on outstanding borrowings at December 31, 2001, would increase or decrease by approximately $4,300 on an annualized basis.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are listed under Item 14(a) and are filed as part of this report on the pages indicated. The supplementary data are included in Note 13 of the Notes to Consolidated Financial Statements.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Post Properties, Inc. 37 Post Apartment Homes, L.P.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections under the headings "Election of Directors" entitled "Nominees for Election," "Incumbent Directors -- Term Expiring 2003," and "Incumbent Directors - -- Term Expiring 2004" of the Proxy Statement for Annual Meeting of Shareholders to be held May 23, 2002 (the "Proxy Statement") are incorporated herein by reference for information on Directors of the Registrant. See Item X in Part I hereof for information regarding executive officers of the Registrant. The section under the heading "Other Matters" entitled "Section 16(a) Beneficial Ownership Reporting Compliance" of the Proxy Statement is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The section under the heading "Election of Directors" entitled "Compensation of Directors" of the Proxy Statement and the sections under the heading titled "Executive Compensation" entitled "Summary Compensation Table," "Option Grants Table," "Fiscal Year-End Option Value Table," "Profit Sharing Plan," "Noncompetition Agreements, Employment Agreements and Change of Control Agreements" and "Compensation Committee Interlocks and Insider Participation" of the Proxy Statement are incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section under the heading "Common Stock Ownership by Management and Principal Shareholders" of the Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section under the heading "Certain Transactions" of the Proxy Statement is incorporated herein by reference.
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PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. AND 2. FINANCIAL STATEMENTS AND SCHEDULES
The financial statements and schedules listed below are filed as part of this annual report on the pages indicated.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Post Properties, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders' equity and accumulated earnings, and of cash flows, present fairly, in all material respects, the financial position of Post Properties, Inc. at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years then ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, Post Properties, Inc. adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by Statement of Financial Accounting Standards No. 138, on January 1, 2001.
PricewaterhouseCoopers LLP (signed)
Atlanta, Georgia March 5, 2002
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POST PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
Post Properties, Inc. 41 Post Apartment Homes, L.P
POST PROPERTIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
Post Properties, Inc. 42 Post Apartment Homes, L.P
POST PROPERTIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND ACCUMULATED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
Post Properties, Inc. 43 Post Apartment Homes, L.P
POST PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
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POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
ORGANIZATION
Post Properties, Inc. (the "Company" or "PPI") through its majority owned subsidiary, Post Apartment Homes, L.P. (the "Operating Partnership") currently owns and manages or is in the process of developing apartment communities located in the Atlanta, Dallas, Tampa, Orlando, Washington, D.C., Virginia, Nashville, Houston, Austin, Phoenix, Denver, Pasadena, New York City and Charlotte metropolitan areas. At December 31, 2001, approximately 50.7%, 20.7% and 11.5% (on a unit basis) of the Company's communities are located in the Atlanta, Dallas and Tampa metropolitan areas, respectively.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the consolidated accounts of the Company and the Operating Partnership. The Company's investments in non-majority owned entities in which it does not exercise unilateral control, but has the ability to exercise significant influence over operating and financial policies, are accounted for on the equity method of accounting. Accordingly, the Company's share of the net earnings or losses of these entities is included in consolidated net income. All significant inter company accounts and transactions have been eliminated in consolidation. Since units can be redeemed for shares of the Company on a one-for-one basis at the Operating Partnership's option, minority interest of unitholders in the operations of the Operating Partnership is calculated based on the weighted average of shares and units outstanding during the period.
Certain items in the 2000 and 1999 consolidated financial statements were reclassified for comparative purposes with the 2001 consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Hedging Activities." This standard established accounting and reporting standards for derivative and hedging activities and required the Company to recognize all derivative financial instruments on its balance sheet at fair value. Upon adoption of SFAS No. 133, the Company recorded a derivative instrument liability of $1,299, net of minority interest, and an adjustment of $1,299, net of minority interest, to accumulated other comprehensive income, a shareholders' equity account, representing the fair value of its outstanding interest rate swap agreements. The Company also recorded a net transition adjustment loss in the statement of operations of $613, net of minority interest, relating to the write down of the book value of it's interest rate cap agreements to their fair value.
For all outstanding derivative financial instruments and for future use of derivative financial instruments, the Company designates the specific instruments as a hedge of identified cash flow exposure. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedged transactions. In this documentation, the Company will specifically identify the asset, liability, firm commitment, or forecasted transaction that has been designated as a hedged item and will state how the hedged instrument is expected to hedge the risks related to the hedged item. The Company will formally measure effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. The Company may discontinue hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; when the derivative is expired or sold, terminated or exercised; or when the derivative is re-designated to no longer be a hedged instrument.
The Company currently utilizes only qualifying cash flow hedges that are designated specifically to reduce exposure to interest rate risk by locking in the expected future cash payments on certain designated liabilities. This is typically accomplished using an interest rate swap or interest rate cap arrangement. For financial reporting purposes, a cash flow hedge is recorded at fair value in the balance sheet. The gain or loss on the effective portion of these types of cash flow hedges are deferred and recorded as a component of accumulated other comprehensive income until the hedged transactions are recognized in earnings. The ineffective portion of these cash flow hedges are recorded immediately in earnings.
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POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
At December 31, 2001, the Company has outstanding interest rate swap agreements with a notional value of $129,000 with maturity dates ranging from 2005 to 2009. For the year ended December 31, 2001, the Company recorded the unrealized net loss of $4,565, net minority interest, resulting from the change in fair value of these cash flow hedges as a reduction in accumulated other comprehensive income, a shareholders' equity account. In addition, the Company recorded the change in fair value of the ineffective component of its outstanding interest rate cap agreements in its statement of operations for the year ended December 31, 2001. This charge against earnings and the fair value of the interest rate cap agreements as of December 31, 2001 were not significant to the Company's financial position or results of operations. In 2002, the Company expects to reclassify out of accumulated other comprehensive income approximately $1,231.
In 2001, the Financial Accounting Standards Board issued several new accounting pronouncements, which are discussed in the following paragraphs.
SFAS No. 141, "Business Combinations", which requires all business combinations initiated after June 30, 2001 to be accounted for under the purchase method, was issued in July 2001. SFAS No. 141 supersedes APB Opinion No. 16, "Accounting for Pre-acquisition Contingencies of Purchase Enterprises". The adoption of SFAS No. 141 did not have a significant effect on the Company's results of operations or its financial position.
SFAS No. 142, "Goodwill and Other Intangible Assets", was issued in July 2001. Under SFAS No. 142, the amortization of goodwill or other intangible assets with indefinite lives is no longer required, but will be subject to periodic testing for impairment. SFAS No. 142 supersedes APB Opinion No. 17, "Intangible Assets". The Company will implement SFAS No. 142 on January 1, 2002. The Company believes the provisions of SFAS No. 142 will not have a significant effect on its results of operations or its financial position.
SFAS No. 143, "Account for Obligations Associated with Retirement of Long-Lived Assets", was issued in August 2001. SFAS No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement costs. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS No. 143 is effective in fiscal years beginning after June 15, 2002. The Company believes the provisions of SFAS No. 143 will not have a significant effect on its results of operations or its financial position.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," that replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", was issued in October 2001. SFAS No. 144 requires that long-lived assets be measured at the lower of their carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and the Company will implement the provisions of SFAS No. 144 on January 1, 2002. The Company believes the provisions of SFAS No. 144 will not have a significant effect on the Company's net results of operations or its financial position.
COST CAPITALIZATION
The Company capitalizes those expenditures relating to the acquisition of new assets, the development and construction of new apartment communities, the enhancement of the value of existing assets and expenditures that substantially extend the life of existing assets. All other expenditures necessary to maintain a community in ordinary operating condition are expensed as incurred. Additionally, for new development communities, carpet, vinyl, and blind replacements are expensed as incurred during the first five years (which corresponds to the estimated depreciable life). Thereafter, these replacements are capitalized. The Company expenses as incurred all interior and exterior painting of communities.
The Company capitalizes interest, real estate taxes, and certain internal personnel and associated costs directly related to apartment communities under development and construction. The incremental personnel and associated costs are capitalized to projects under development based upon the effort directly identifiable with such projects. The Company treats each unit in an apartment community separately for cost accumulation, capitalization and expense recognition purposes. Prior to the commencement of leasing activities, interest and other construction costs are capitalized and reflected on the balance sheet as construction in progress. The Company ceases the capitalization of such costs as the residential units in a community become
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POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
substantially complete and available for occupancy. In addition, prior to the completion of units, the Company expenses as incurred substantially all operating expenses (including pre-opening marketing expenses) of such communities.
REAL ESTATE ASSETS, DEPRECIATION AND IMPAIRMENT
Real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. Major replacements and betterments are capitalized and depreciated over their estimated useful lives. Depreciation is computed on a straight-line basis over the useful lives of the properties (buildings and components and related land improvements -- 20-40 years; furniture, fixtures and equipment -- 5 - 10 years).
The Company continually evaluates the recoverability of the carrying value of its real estate assets using the methodology prescribed in Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Factors considered by management in evaluating impairments include significant declines in property operating profits, recurring property operating losses and other significant adverse changes in general market conditions that are considered permanent in nature. If any real estate asset held for investment is considered impaired, a loss is recorded to reduce the carrying value of the asset to its fair value. If a real estate asset is held for sale, any estimated loss is recorded to reduce the carrying value of the asset to its fair value less costs to sell. Subsequent to the classification of assets as held for sale, no further depreciation expense is recorded.
As discussed above, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," that replaces SFAS No. 121. SFAS No. 144 requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and the Company will implement the provisions of SFAS No. 144 beginning on January 1, 2002. The Company believes the provisions of SFAS No. 144 will not have a significant effect on the Company's net results of operations or its financial position.
REAL ESTATE ASSETS HELD FOR SALE
Under both SFAS No. 121 and 144, real estate assets held for sale are stated at their fair value less cost to sell. The Company classifies real estate assets as held for sale when its internal investment committee approves the sale and the Company has commenced an active program to sell the assets. Subsequent to this classification, no further depreciation is recorded on the assets. The operating results of real estate assets held for sale are included in continuing operations in the consolidated statement of operations. Upon the implementation of SFAS No. 144 in 2002, the operating results of real estate assets held for sale and real estate assets sold will be included in discontinued operations in the consolidated statement of operations.
REVENUE RECOGNITION
Rental -- Residential properties are leased under operating leases with terms of generally one year or less. Rental income is recognized when earned, which is not materially different from revenue recognition on a straight-line basis.
Property management and landscaping services -- Income is recognized when earned for property management and landscaping services provided to third parties.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, all investments purchased with an original maturity of three months or less are considered to be cash equivalents.
RESTRICTED CASH
Restricted cash generally is comprised of resident security deposits for communities located in Florida and Tennessee and required maintenance reserves for communities located in DeKalb County, Georgia.
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POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
DEFERRED FINANCING COSTS
Deferred financing costs are amortized using the interest method over the terms of the related debt.
PER SHARE DATA
Basic earnings per common share with respect to the Company for the years ended December 31, 2001, 2000 and 1999 is computed based upon the weighted average number of shares outstanding during the period. Diluted earnings per common share is based upon the weighted average number of shares outstanding during the period and includes the effect of the potential issuance of additional shares if stock options were exercised or converted into common stock.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. DEFERRED CHARGES
Deferred charges consist of the following:
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POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
3. NOTES PAYABLE
At December 31, 2001 and 2000, the Company's indebtedness consisted of the following:
(1) All outstanding indebtedness can be prepaid at any time, subject to certain prepayment penalties. (2) Contains $100,000 of Mandatory Par Put Remarketed Securities. The annual interest rate on these securities to 2005 (the "Remarketing Date") is 6.85%. On the Remarketing Date, they are subject to mandatory tender for remarketing. (3) Represents stated rate. Stated rate increased to LIBOR plus 0.85% in 2002. At December 31, 2001, the outstanding balance of the Revolver consisted of "money market" loans with an average interest rate of 2.46%. (4) This loan is interest free for the first three years, with interest at 5.00% thereafter. (5) In 2000, interest rate was fixed at 6.975%, inclusive of credit enhancement and other fees, to 2009 through an interest rate swap arrangement. (6) This note bears interest at 6.50% with an effective rate of 7.30%. (7) FNMA credit enhanced bond indebtedness. Interest based on FNMA "AAA" tax exempt rate plus credit enhancement and other fees of 0.639%. Interest rate represents rate at December 31, 2001 before credit enhancements. The Company has outstanding interest rate cap arrangements that limit the Company's exposure to increases in the base interest rate to 5%.
SENIOR AND MEDIUM TERM NOTES
In 2001, the Company issued $50,000 of 6.71% senior unsecured notes due in 2006. The net proceeds from the notes were used to repay outstanding indebtedness. In 2001, the Company repaid the outstanding balance of one medium term note issuance totaling $37,000 and one senior note issuance totaling $30,000 at their scheduled maturing dates. All of the unsecured notes are subject to certain covenants, including those governing the Company's interest and fixed charge coverage and total leverage.
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POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
DEBT MATURITIES
The aggregate maturities of the Company's indebtedness are as follows(1):
(1) Excludes outstanding balances on lines of credit discussed below.
UNSECURED LINES OF CREDIT
The Company utilizes a $320,000 three-year syndicated revolving line of credit (the "Revolver"), for its short-term financing requirements. At December 31, 2001, the stated interest rate for the Revolver was LIBOR plus 0.75% or prime minus 0.25%. Subsequent to year end, the stated rate increased to LIBOR plus 0.85% as a result of a credit rating agency downgrade on the Company's senior unsecured debt. The Revolver provides for the rate to be adjusted up or down based on changes in the credit ratings on the Company's senior unsecured debt. The Revolver also includes a money market competitive bid option for short-term funds up to $160,000 at rates below the stated line rate. The credit agreement for the Revolver contains customary representations, covenants and events of default, including covenants which restrict the ability of the Operating Partnership to make distributions, in excess of stated amounts, which in turn restrict the discretion of the Company to declare and pay dividends. In general, during any fiscal year the Operating Partnership may only distribute up to 100% of the Operating Partnership's consolidated income available for distribution (as defined in the credit agreement) exclusive of distributions of up to $30,000 of capital gains for such year. The credit agreement contains exceptions to these limitations to allow the Operating Partnership to make distributions necessary to allow the Company to maintain its status as a REIT. The Company does not anticipate that this covenant will adversely affect the ability of the Operating Partnership to make distributions, or the Company to declare dividends, under the Company's current dividend level. The Revolver matures in April 2004.
The Company also has in place an additional $185,000 line of credit facility for general corporate purposes. This line, with an annual renewal, matures in April 2002 and carries terms substantially equal to the Revolver. The Company expects to renew this credit facility, although the total capacity and terms may vary.
Additionally, the Company has a $20,000 unsecured line of credit with Wachovia Bank of Georgia, N.A. (the "Cash Management Line"). The Cash Management Line bears interest at LIBOR plus 0.75% or prime minus .25% and matures in February 2003. Management believes the Cash Management Line will be renewed at maturity with similar terms.
INTEREST PAID
Interest paid (including capitalized amounts of $22,124, $25,426 and $21,417 for the years ended December 31, 2001, 2000 and 1999, respectively), aggregated $82,383, $74,419 and $51,337 for the years ended December 31, 2001, 2000 and 1999, respectively.
PLEDGED ASSETS
The aggregate net book value at December 31, 2001 of property pledged as collateral for indebtedness amounted to approximately $457,038.
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POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
EXTRAORDINARY ITEM
The extraordinary losses for the years ended December 31, 2001 and 1999 of $88 ($77 net of minority interest) and $521 ($458 net of minority interest), respectively, resulted from costs associates with the early extinguishment of indebtedness.
4. INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ENTITIES
In 2001, the Company contributed two apartment communities under development in Atlanta, Georgia and one apartment community in Pasadena, California to individual limited liability companies (the "Property LLCs") with an institutional investor. The Company holds a 35% equity interest in the Property LLCs. The total estimated development cost of the apartment communities of $144,000 is being funded through member equity contributions proportionate to the members' ownership interests and through construction financing provided by the Company. No gain or loss was recognized on the Company's contribution to the Property LLCs. The Company provides real estate services (development, construction and property management) to the Property LLCs. The Company accounts for its investments in these Property LLCs using the equity method of accounting. The excess of the Company's investment over its equity in the underlying net assets of the Property LLCs was approximately $3,123 at December 31, 2001. This excess investment will primarily be amortized as a reduction to earnings on a straight-line basis over the lives of the related assets.
The operating results of the Company include its proportionate share of net income (loss) from the investments in the Property LLCs. A summary of financial information for the Property LLCs in the aggregate is as follows:
At December 31, 2001, two of the apartment communities had commenced initial rental operations. The third community was under construction with an anticipated completion date in 2002. The Company's share of the net loss from these investments is included in other revenue in the accompanying consolidated financial statements.
The Company has committed construction financing to the Property LLCs totaling $111,271 ($77,019 funded at December 31, 2001). These loans earn interest at LIBOR plus 1.75% and are secured by the apartment communities. The loans mature on dates ranging from February 2003 to February 2004 and are expected to be repaid from the proceeds of permanent project financings. A portion of the construction loan financing from the Company totaling approximately $50,062 represents an obligation of the institutional investor member of the Property LLCs.
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POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
As part of the development and construction services agreements entered into between the Company and the Property LLCs, the Company guaranteed the maximum total amount for certain construction cost categories subject to aggregate limits (approximately $14,000). At December 31, 2001, the Company's estimated obligations under the agreements total approximately $900. If the Company is unsuccessful in mitigating these estimated costs, the Company will be required to fund the amounts to the Property LLCs. Any amounts funded will be accounted for as part of the Company's investment in the Property LLCs. Additionally, under these agreements, the Company is subject to project completion requirements, as defined. At December 31, 2001, the Company believes that it will meet the completion date requirements and not be subject to any additional costs.
5. REAL ESTATE ASSETS HELD FOR SALE AND ASSET DISPOSITIONS
The Company classifies real estate assets as held for sale after the approval of its internal investment committee and after the Company has commenced an active program to sell the assets. At December 31 2001, the Company has classified two apartment communities, six tracts of land and one commercial property as held for sale. These real estate assets are reflected in the accompanying consolidated balance sheet at $39,419 which represented the lower of cost or fair value less costs to sell. The Company expects the sale of these assets to occur in 2002.
For the years ended December 31, 2001, 2000 and 1999, the consolidated statements of operations include net income of $4,071, $4,019 and $3,940, respectively, from communities held for sale at December 31, 2001. For the year ended December 31, 2001, depreciation expense of $844 was recognized on these assets prior to the date of held for sale classification.
In 2001, the Company sold six apartment communities containing 2,799 units for net proceeds of approximately $210,443. The communities sold were located in Atlanta, Georgia, Dallas, Texas and Nashville, Tennessee. Additionally, the Company sold land parcels in Dallas, Texas, Denver, Colorado and Charlotte, North Carolina and a commercial property in Dallas, Texas for aggregate net proceeds of $9,679. These sales resulted in net gains of approximately $16,365. For the year ended December 31, 2001, the aggregate net gain on the sale of assets of $23,942 included the impact of the estimated net losses totaling $11,490 on the write down to fair value of assets designated as held for sale at December 31, 2001 and excluded realized losses totaling $19,067 related to assets written down to their estimated fair value at December 31, 2000.
In 2000, the Company sold eight apartment communities containing 1,984 units for net proceeds of approximately $157,265, resulting in net gains of approximately $24,266. The communities sold were located in Atlanta, Georgia, Jackson, Mississippi and Nashville, Tennessee. For the year ended December 31, 2000, the aggregate net gain on the sale of assets of $3,208 included the estimated net losses totaling $21,058 on the write down to fair value of assets designated as held for sale at December 31, 2000.
In 1999, the Company sold one apartment community containing 198 units and other land parcels for net proceeds of approximately $16,587, resulting in a net loss of $1,522.
6. SHAREHOLDERS' EQUITY/MINORITY INTEREST
PREFERRED STOCK
At December 31, 2001 and 2000, the Company had issued three series of preferred stock with the following characteristics:
(1) The preferred stock is redeemable by the Company for cash.
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POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
COMPUTATION OF EARNINGS PER COMMON SHARE
For the years ended December 31, 2001, 2000 and 1999, basic and diluted earnings per common share for income before extraordinary item, net of preferred dividends, and income available to common shareholders before cumulative effect of accounting change and extraordinary item has been computed as follows:
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POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
PREFERRED UNITS
The Operating Partnership has outstanding 2,800,000, 8% Series D cumulative redeemable preferred units (the "Series D Preferred Units"). The Series D Preferred Units have a liquidation preference of $25.00 per unit and are redeemable by the Operating Partnership on or after September 3, 2004, at a redemption price of $25.00 per unit. The Series D Preferred Units are exchangeable into authorized, but unissued Series D preferred stock of the Company, with identical terms and preferences, on or after September 2, 2009, at the option of the holders. Under certain circumstances, as defined in the agreement, the Series D preferred Units may become exchangeable on or after September 3, 2002, at the option of the holders.
7. PROJECT ABANDONMENT, EMPLOYEE SEVERANCE AND IMPAIRMENT CHARGES
The Company recorded project impairment and abandonment, employee severance and asset impairment charges for the years ended December 31, 2001 and 2000. The charges are summarized as follows:
In the fourth quarter of 2001, the Company recorded charges totaling $17,450. These charges, precipitated by the sharp decline in economic and market conditions, reflect management's decision to focus its business and new development strategy on fewer markets, to focus on its core business of owning, developing and managing multifamily real estate assets and to do so with a smaller workforce and lower overhead expenses. The project impairment and abandonment charge of $8,122 represents reserves on certain predevelopment and transaction pursuit costs in markets the Company will no longer pursue for development opportunities and for certain projects that will no longer be pursued due to economic and market conditions. The employee severance charge of $3,560 is primarily for severance costs related to approximately a 100 person senior management and staff workforce reduction plan initiated and completed in the fourth quarter of 2001. The asset impairment and disposition charge includes a loss of $2,831 related to the disposition of the Company's corporate aircraft, a loss of $452 on the sale of the Company's third party landscape business discussed more fully below, impairment charges of $1,000 related to the Company's exit from the for-sale housing business in all markets and the write-down to estimated market value of certain internet and technology investments of $1,485.
At December 31, 2001, approximately $3,632 of these charges, primarily employee severance costs, remained as an accrued liability on the consolidated balance sheet. These amounts are expected to be paid in 2002.
In the fourth quarter of 2001, the Company sold substantially all of the net assets of Post Landscape Group, Inc., a subsidiary entity that provided landscape maintenance, design and installation services to third parties, and RAM Partners, Inc., a separate subsidiary entity that managed apartment communities for third parties. These businesses were sold to members of the respective former management teams of the subsidiaries. The Company financed 100% of the sales price of $5,767 (adjusted for working capital transfers at closing) through purchase money notes with interest of 9%. The notes require periodic interest, annual principal and balloon principal payments in 2006. The notes can be extended for two one-year periods. Under generally accepted accounting principles, the transactions have not been recorded as sales at December 31, 2001, and will not be recorded as sales until the conditions for sale recognition, primarily the receipt of an adequate down payment on the notes, are met. Until these transactions are recognized as sales, the book value of the assets and liabilities of these business are included in the Company's consolidated balance sheet. Any collections under the notes will reduce the carrying value of the assets. The sale of the Post Landscape Group resulted in a loss of $452. Under generally accepted accounting principles, this loss was recognized in 2001 and included in the project abandonment, employee severance and impairment charges discussed above. The sale of RAM Partners will result in a gain of approximately $591, which will be recognized when the conditions for full sale recognition are met (expected in 2002).
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POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
In the fourth quarter of 2000, the Company recorded charges of $9,365. These charges reflect management's decision to restrict its development activities to fewer markets, refine its development investment and for-sale housing strategies and make changes in its executive management team. Project abandonment charges totaling $4,389 related to the write off of predevelopment and pursuit costs in markets in which the Company will no longer pursue development opportunities and on certain proposed development deals not meeting management's revised development strategy. Employee severance charges related to the termination costs of four executive positions and five staff personnel in the Company's Dallas, Texas regional office. The asset impairment charge of $1,910 includes a charge of $1,503 related to the write off of the Company's investment in a high speed internet provider that filed for bankruptcy protection and a charge of $407 related to the exit from the for-sale housing business in certain markets. As of December 31, 2001, all of the 2000 charges had been paid.
8. INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). To qualify as a REIT, the Company must distribute annually at least 90% of its adjusted taxable income, as defined in the Code, to its shareholders and satisfy certain other organizational and operating requirements. It is management's current intention to adhere to these requirements and maintain the Company's REIT status. As a REIT, the Company generally will not be subject to Federal income tax at the corporate level on the taxable income it distributes to its shareholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. The Company may be subject to certain state and local taxes on its income and property, and to federal income taxes and excise taxes on its undistributed taxable income.
The Company utilizes taxable REIT subsidiaries to perform such non-REIT activities as asset management, leasing and landscaping services for third parties. These taxable REIT subsidiaries are subject to federal, state and local income taxes. For the three years in the period ended December 31, 2001, the impact of these taxable REIT subsidiaries' income taxes and their related tax attributes were not material to the accompanying consolidated financial statements.
RECONCILIATION OF NET INCOME TO TAXABLE INCOME
As discussed in Note 1, the Company conducts substantially all of its operations through its majority-owned subsidiary, the Operating Partnership. For income tax reporting purposes, the Company receives an allocable share of the Operating Partnership's ordinary income and capital gains based on its weighted average ownership adjusted for certain specially allocated items. All adjustments to net income in the table below are net of amounts attributable to minority interests and taxable REIT subsidiaries. A reconciliation of net income to taxable income for the years ended December 31, 2001, 2000 and 1999 is detailed below:
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POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
INCOME TAX CHARACTERIZATION OF DIVIDENDS
For income tax purposes, dividends to common shareholders are characterized as ordinary income, capital gains or as a return of a shareholder's invested capital. A summary of the income tax characterization of the Company's dividends paid per common share were as follows for the years ended December 31, 2001, 2000 and 1999:
The income tax characterization of dividends to common shareholders is based on the calculation of Taxable Earnings and Profits, as defined in the Code. Taxable Earnings and Profits differ from regular taxable income due primarily to differences in the estimated useful lives and methods used to compute depreciation and in the recognition of gains and losses on the sale of real estate assets.
As of December 31, 2001, the net basis for federal income tax purposes taking into account the special allocation of gain to the partners contributing property to the Operating Partnership and including minority interest in the Operating Partnership was lower than the net assets as reported in the Company's consolidated financial statements by $6,640.
9. STOCK-BASED COMPENSATION PLANS
STOCK COMPENSATION PLANS
At December 31, 2001, the Company had two stock-based compensation plans, the Employee Stock Plan (the "Stock Plan"), the Employee Stock Purchase Plan (the "ESPP") and, under the Stock Plan, a stock grant program (the "Grant Plan") as described below. The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its plans. Accordingly, based upon the criteria of APB Opinion 25 no compensation cost is required to be recognized for the Stock Plan and the ESPP. The compensation cost which is required to be charged against income for the Grant Plan, was $112, $138 and $205 for 2001, 2000 and 1999, respectively. Had compensation cost for the Company's Stock Plan and ESPP been determined based on the fair value at the grant dates for awards under the Plans consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
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POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
For purposes of the pro forma presentation, the fair value of each option grant is estimated as of the date of grant using the Black-Scholes option-pricing model. The weighted-average of all assumptions used in the calculation for various grants under all of the Company's plans during 2001, 2000 and 1999 are as follows:
EMPLOYEE STOCK PLAN
Under the Stock Plan, the Company may grant to its employees and directors options to purchase up to 6,000,000 shares of common stock. Of this amount, 550,000 shares are available for grants of restricted stock. Options granted to any key employee or officer cannot exceed 100,000 shares a year (500,000 shares if such key employee or officer is a member of the Company's Executive Committee). The exercise price of each option may not be less than the market price on the date of grant and all options have a maximum term of ten years from the grant date.
A summary of the status of stock option activity under the Stock Plan as of December 31, 2001, 2000 and 1999, is presented below:
At December 31, 2001, the range of exercise prices for options outstanding was $27.625 - $44.125 and the weighted-average remaining contractual life was 6 years.
In 2001, under its existing Stock Plan, the Company granted 17,566 shares of restricted stock to company officers. The restricted shares vest ratably over a five-year period. The total value of the restricted share grants of $644 was initially reflected in shareholders' equity as additional capital reduced by non-amortized deferred compensation expense. Such deferred compensation is amortized ratably into compensation expense over the vesting period.
10. EMPLOYEE BENEFIT PLANS
The employees of the Company are participants in a defined contribution plan pursuant to Section 401 of the Internal Revenue Code. Beginning in 1996, Company contributions, if any, to this plan are based on the performance of the Company and are allocated to each participant based on the relative contribution of the participant to the total contributions of all participants. For purposes of allocating the Company contribution, the maximum employee contribution included in the calculation is 3% of salary. Company contributions of $638, $514 and $346 were made in 2001, 2000 and 1999, respectively.
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POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
The Company maintains an Employee Stock Purchase Plan ("ESPP") to encourage stock ownership by eligible directors and employees. To participate in the ESPP, (i) directors must not be employed by the Company or the Operating Partnership and must have been a member of the Board of Directors for at least one month and (ii) an employee must have been employed full or part-time by the Company or the Operating Partnership for at least one month. The purchase price of shares of Common Stock under the ESPP is equal to 85% of the lesser of the closing price per share of Common Stock on the first or last day of the trading period, as defined.
11. COMMITMENTS AND CONTINGENCIES
LAND, OFFICE AND EQUIPMENT LEASES
The Company is party to two ground leases with terms expiring in years 2040 and 2043 relating to a single operating community, one ground lease expiring in 2038 for a second operating community, three ground leases expiring in 2066, 2069 and 2074 for three communities under development and to office, equipment and other operating leases with terms expiring in years 2001 through 2004. Future minimum lease payments for non-cancelable land, office, equipment and other leases at December 31, 2001, are as follows:
The Company incurred $5,998, $5,935 and $5,109 of rent expense for the years ended December 31, 2001, 2000 and 1999, respectively.
CONTINGENCIES
The Company is party to various legal actions which are incidental to its business. Management believes that these actions will not have a material adverse affect on the consolidated balance sheets and statements of operations.
12. RELATED PARTY TRANSACTIONS
In 2001, the Company invested in three Property LLCs that are accounted for under the equity method of accounting (see Note 4). In 2001, the Company recorded development fees, general construction contract billings, management fees and expense reimbursements (primarily personnel costs) of approximately $15,202 from these related companies. Additionally in 2001, the Company earned interest under the construction loans to the Project LLCs totaling $1,024.
The Company provides landscaping services for executive officers, employees, directors and other related parties. For the years ended December 31, 2001, 2000 and 1999, the Company received landscaping revenue of $ 705, $667 and $610 for such services. Such revenue includes reimbursement of direct and indirect expenses. Additionally, the Company provides accounting and administrative services to entities controlled by certain executive officers of the Company. Fees under this arrangement aggregated $25 for each year ended December 31, 2001, 2000 and 1999, respectively. Also, the Company was contracted to assist in the development of apartment complexes constructed by a former executive and current shareholder. Fees under this arrangement were $7, $29 and $100 for the years ended December 31, 2001, 2000 and 1999, respectively.
In 2001, 2000 and 1999, the Company loaned $2,500, $1,500 and $7,750, respectively, to certain executives. These loans are payable ten years from the issue date and bear interest at a rate of 6.32% per annum. Proceeds from these loans were used by these executives to acquire the Company's common shares on the open market. At December 31, 2001, $2,500 of the loans have been repaid. Additionally, in 2001, the Company loaned $1,300 to certain executives. The loans bear interest at 6.32% per annum. If the executives continue to be employed by the Company, the loans will be forgiven annually over five to ten year periods, as defined in the agreements. The annual loan forgiveness of $160 is recorded as compensation expense.
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POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were determined by management using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash equivalents, rents and accounts receivables, accounts payable, accrued expenses, agreements and other liabilities are carried at amounts which reasonably approximate their fair values because of the short-term nature of these investments. The fair value of fixed rate debt was approximately $847,563 (carrying value of $807,238) and the fair value of floating rate debt approximated its carrying value due to the adjustable nature of the arrangements at December 31, 2001.
In order to manage the impact of interest rate changes on earnings and cash flow, the Company entered into and has outstanding interest rate swap and interest rate cap arrangements. As more fully described in Note 1, the fair values of these interest rate cap and interest rate swap agreements are carried on the consolidated balance sheet at fair market value in accordance with SFAS No. 133. At December 31, 2001, the carrying amounts related to these arrangements represented net liabilities totaling approximately $6,630.
Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 2001. Although management is not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.
14. SEGMENT INFORMATION
SEGMENT DESCRIPTION
In accordance with SFAS No. 131, "Disclosure About the Segments of an Enterprise and Related Information," the Company presents segment information based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance. The segment information is prepared on substantially the same basis as the internally reported information used by the Company's chief operating decision makers to manage the business.
The Company's chief operating decision makers focus on the Company's primary sources of income from property rental operations. Property rental operations are broken down into five segments based on the various stages in the property ownership lifecycle. These segments are described below. All other ancillary service and support operations, including the third party service businesses (see Note 7), are aggregated in the accompanying segment information.
- Fully stabilized communities - those apartment communities which have been stabilized (the earlier of the point at which a property reaches 95% occupancy or one year after completion of construction) for both the current and prior year.
- Communities stabilized during 2000 - communities which reached stabilized occupancy in the prior year.
- Development and lease up communities - those communities that are in lease-up but were not stabilized by the beginning of the current year, including communities that stabilized during the current year.
- Communities held for sale - those communities that are being marketed for sale.
- Sold communities - communities which were sold in the current or prior year.
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POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
SEGMENT PERFORMANCE MEASURE
Management uses contribution to funds from operations ("FFO") as the performance measure for its segments. Effective January 1, 2000, FFO is defined by the National Association of Real Estate Investment Trusts as net income available to common shareholders determined in accordance with generally accepted accounting principles ("GAAP"), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real estate assets, and after adjustment for unconsolidated partnerships and joint ventures. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Company's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's needs.
SEGMENT INFORMATION
The following table reflects each segment's contribution to consolidated revenues and FFO together with a reconciliation of segment contribution to FFO, total FFO and income before extraordinary item and preferred dividends. Additionally, substantially all of the Company's assets relate to the Company's property rental operations. Asset cost, depreciation and amortization by segment are not presented because such information at the segment level is not reported internally.
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POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
15. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities for the years ended December 31, 2001, 2000 and 1999 are as follows:
(a) In 2001, 2000 and 1999, holders of 62,523, 12,014 and 22,299 Units in the Operating Partnership, respectively, exercised their option to convert their Units to shares of the Company on a one-for-one basis. The net effect of the capital allocated to the unitholders of the Operating Partnership on the dates of the offerings, the subsequent conversion of Units of the Operating Partnership to shares of the Company, and the adjustments to minority interest for the dilutive impact of the Dividend Reinvestment and Employee Stock Purchase Plans, decreased minority interest and increased shareholders' equity in the amounts of $5,194, $320 and $857 for the years ended December 31, 2001, 2000 and 1999, respectively.
(b) The Operating Partnership committed to distribute $32,741, $33,466 and $30,818 for the quarters ended December 31, 2001, 2000 and 1999, respectively. As a result, the Company declared dividends of $28,748, $29,528 and $27,184 for the quarters ended December 31, 2001, 2000 and 1999, respectively. The remaining distributions from the Operating Partnership in the amount of $3,993, $3,938 and $3,634 for the quarters ended December 31, 2001, 2000 and 1999, respectively, are distributed to minority interest unitholders in the Operating Partnership.
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended 2001 and 2000 are as follows:
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POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
* The total of the four quarterly amounts for minority interest of unitholders in Operating Partnership, extraordinary item, net income and earnings per share may not equal the total for the year. These differences result from the use of a weighted average to compute minority interest in the Operating Partnership and average number of shares outstanding.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Post Apartment Homes, L.P.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of partners' equity, and of cash flows, present fairly, in all material respects, the financial position of Post Apartment Homes, L.P. at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, Post Apartment Homes, L.P. adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by Statement of Financial Accounting Standards No. 138, on January 1, 2001.
PricewaterhouseCoopers LLP (signed)
Atlanta, Georgia March 5, 2002
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POST APARTMENT HOMES, L.P. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
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POST APARTMENT HOMES, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
The accompanying notes are an integral part of these consolidated financial statements.
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POST APARTMENT HOMES, L.P. CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
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POST APARTMENT HOMES, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
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POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
ORGANIZATION
Post Apartment Homes, L.P. (the "Operating Partnership"), a Georgia limited partnership, was formed on January 22, 1993, to conduct the business of developing, leasing and managing upscale multi-family apartment communities for its general partner, Post Properties, Inc. (the "Company" or "PPI"). The Operating Partnership, through its operating divisions and subsidiaries, is the entity through which all of the Company's operations are conducted. At December 31, 2001, the Company, through wholly owned subsidiaries, controlled the Operating Partnership as the sole general partner and as the holder of 87.8% of the common units in the Operating Partnership ("Common Units") and 63.6% of the Perpetual Preferred Partnership Units ("Preferred Units"). As the sole general partner, the Company holds approximately 1% of the common units in the Operating Partnership. The other limited partners of the Operating Partnership, who hold Common Units, are those persons (including certain officers and directors of the Company) who, at the time of Initial Offering, elected to hold all or a portion of the their interest in the form of Common Units rather than receiving shares of Company common stock. Each Common Unit may be redeemed by the holder thereof for either one share of Company common stock or cash equal to the fair market value thereof at the time of such redemptions, at the option of the Operating Partnership. The Operating Partnership presently anticipates that it will cause shares of Common Stock to be issued in connections with each such redemption rather than paying cash (as has been done in all redemptions to date). With each redemption of outstanding Units for Common Stock, the Company's percentage ownership interest in the Operating Partnership will increase. In addition, whenever the Company issues shares of common stock, the Company will contribute any net proceeds therefrom to the Operating Partnership and the Operating Partnership will issue an equivalent number of Common Units to the Company.
The Company elected to be taxed as a real estate investment trust ("REIT") for Federal income tax purposes beginning with the year ended December 31, 1993. A REIT is a legal entity that holds real estate interest and, through payments of dividends to shareholder, in practical effect is not subject to Federal income taxes at the corporate level.
The Operating partnership currently owns and manages or in the process of developing apartment communities located in the Atlanta, Dallas, Tampa, Orlando, Washington, D.C., Virginia, Nashville, Houston, Austin, Phoenix, Denver, Pasadena, New York City and Charlotte metropolitan areas. At December 31, 2001, approximately 50.7%, 20.7% and 11.5% (on a unit basis) of the Company's communities are located in the Atlanta, Dallas and Tampa metropolitan areas, respectively.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the consolidated accounts of the Operating Partnership. All significant intercompany accounts and transactions have been eliminated in consolidation. The Operating Partnership's investments in non-majority owned entities in which it does not exercise unilateral control, but has the ability to exercise significant influence over the operating and financial policies, are accounted for on the equity method of accounting. Accordingly, the Operating Partnership's share of the net earnings or losses of these entities is included in consolidated net income. All significant inter-company accounts and transactions have been eliminated in consolidation.
Certain items in the 2000 and 1999 consolidated financial statements were reclassified for comparative purposes with the 2001 consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2001, the Operating Partnership adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Hedging Activities." This standard established accounting and reporting standards for derivative and hedging activities and required the Operating Partnership to recognize all derivative financial instruments on its balance sheet at fair value. Upon adoption of SFAS No. 133, the Operating Partnership recorded a derivative instrument liability of $1,472 and an adjustment of $1,472 to accumulated other comprehensive income, a partners' equity account, representing the fair value of its outstanding interest rate swap agreements. The Operating Partnership also recorded a net transition adjustment loss in the statement of operations of $695, relating to the write down of the book value of its interest rate cap agreements to their fair value.
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For all outstanding derivative financial instruments and for future use of derivative financial instruments, the Operating Partnership designates the specific instruments as a hedge of identified cash flow exposure. The Operating Partnership formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedged transactions. In this documentation, the Operating Partnership will specifically identify the asset, liability, firm commitment, or forecasted transaction that has been designated as a hedged item and will state how the hedged instrument is expected to hedge the risks related to the hedged item. The Operating Partnership will formally measure effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. The Operating Partnership may discontinue hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; when the derivative is expired or sold, terminated or exercised; or when the derivative is re-designated to no longer be a hedged instrument.
The Operating Partnership currently utilizes only qualifying cash flow hedges that are designated specifically to reduce exposure to interest rate risk by locking in the expected future cash payments on certain designated liabilities. This is typically accomplished using an interest rate swap or interest rate cap arrangement. For financial reporting purposes, a cash flow hedge is recorded at fair value in the balance sheet. The gain or loss on the effective portion of these types of cash flow hedges are deferred and recorded as a component of accumulated other comprehensive income until the hedged transactions are recognized in earnings. The ineffective portion of these cash flow hedges are recorded immediately in earnings.
At December 31, 2001, the Operating Partnership has outstanding interest rate swap agreements with a notional value of $129,000 with maturity dates ranging from 2005 to 2009. For the year ended December 31, 2001, the Operating Partnership recorded the unrealized net loss of $5,173, resulting from the change in fair value of these cash flow hedges as a reduction in accumulated other comprehensive income, a partners' equity account. In addition, the Operating Partnership recorded the change in fair value of the ineffective component of its outstanding interest rate cap agreements in its statement of operations for the year ended December 31, 2001. This charge against earnings and the fair value of the interest rate cap agreements as of December 31, 2001 were not significant to the Operating Partnership's financial position or results of operations. In 2002, the Operating Partnership expects to reclassify out of accumulated other comprehensive income approximately $1,231.
In 2001, the Financial Accounting Standards Board issued several new accounting pronouncements, which are discussed in the following paragraphs.
SFAS No. 141, "Business Combinations", which requires all business combinations initiated after June 30, 2001 to be accounted for under the purchase method, was issued July 2001. SFAS No. 141 supersedes APB Opinion No. 16, "Accounting for Pre-acquisition Contingencies of Purchase Enterprises," and is effective for all business combinations initiated after June 30, 2001. The adoption of SFAS No. 141 did not have a significant effect on the Operating Partnership results of operations or its financial position.
SFAS No. 142, "Goodwill and Other Intangible Assets," was issued July 2001. Under SFAS No. 142, the amortization of goodwill or other intangible assets with indefinite lives is no longer required, but will be subject to periodic testing for impairment. SFAS No. 142 supersedes APB Opinion No. 17, "Intangible Assets". The Operating Partnership will implement SFAS No. 142 on January 1, 2002. The Operating Partnership believes the provisions of SFAS No. 142 will not have a significant effect on its results of operations or its financial position.
SFAS No. 143, "Account for Obligations Associated with Retirement of Long-Lived Assets," was issued in August 2001. SFAS No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement costs. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS No. 143 is effective in fiscal years beginning after June 15, 2002. The Operating Partnership believes the provisions of SFAS No. 143 will not have a significant effect on its results of operations or its financial position.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," that replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," was issued in October 2001. SFAS No. 144 requires that long-lived assets be measured at the lower of their carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. The provisions of SFAS No. 144 are effective for financial statements issued
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for fiscal years beginning after December 15, 2001 and the Operating Partnership will implement the provisions of SFAS No 144 on January 1, 2002. The Operating Partnership believes the provisions of SFAS No. 144 will not have a significant effect on the Operating Partnership's net results of operations or its financial position.
COST CAPITALIZATION
The Operating Partnership capitalizes those expenditures relating to the acquisition of new assets, the development and construction of new apartment communities, the enhancement of the value of existing assets, and expenditures that substantially extend the life of existing assets. All other expenditures necessary to maintain a community in ordinary operating condition are expensed as incurred. Additionally, for new development communities, carpet, vinyl, and blind replacements are expensed as incurred during the first five years (which corresponds to the estimated depreciable life). Thereafter, these replacements are capitalized. The Operating Partnership expenses as incurred all interior and exterior painting of communities.
The Operating Partnership capitalizes interest, real estate taxes, and certain internal personnel and associated costs directly related to apartment communities under development and construction. The incremental personnel and associated costs are capitalized to projects under development based upon the effort directly identifiable with such projects. The Company treats each unit in an apartment community separately for cost accumulation, capitalization and expense recognition purposes. Prior to commencement of leasing activities, interest and other construction costs are capitalized and reflected on the balance sheet as construction in progress. The Operating Partnership ceases the capitalization of such costs as the residential units in a community become substantially complete and available for occupancy. In addition, prior to the completion of units, the Operating Partnership expenses as incurred substantially all operating expenses (including pre-opening marketing expenses) of such communities.
REAL ESTATE ASSETS, DEPRECIATION AND IMPAIRMENT
Real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. Major replacements and betterments are capitalized and depreciated over their estimated useful lives. Depreciation is computed on a straight-line basis over the useful lives of the properties (buildings and components and related land improvements -- 20-40 years; furniture, fixtures and equipment -- 5 - 10 years).
The Operating Partnership continually evaluates the recoverability of the carrying value of its real estate assets using the methodology prescribed in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Factors considered by management in evaluating impairments include significant declines in property operating profits, recurring property operating losses and other significant adverse changes in general market conditions that are considered permanent in nature. If any real estate asset held for investment is considered impaired, a loss is provided to reduce the carrying value of the asset to its fair value. If a real estate asset is held for sale, any estimated loss is provided to reduce the carrying value of the asset to its fair value less costs to sell. Subsequent to the classification of assets for sale, no further depreciation expense is recorded.
As discussed above, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," that replaces SFAS No. 121. SFAS No. 144 requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and the Operating Partnership will implement the provisions of SFAS No. 144 beginning on January 1, 2002. The Operating Partnership believes the provisions of SFAS No. 144 will not have a significant effect on the Operating Partnership's results of operations or its financial position.
REAL ESTATE ASSETS HELD FOR SALE
Under both SFAS No. 121 and 144, real estate assets held for sale are stated at their fair value less cost to sell. The Operating Partnership classifies real estate assets as held for sale when its internal investment committee approves the sale and the Operating Partnership has commenced an active program to sell the assets. Subsequent to this classification, no further depreciation is recorded on the assets. The operating results of real estate assets held for sale are included in continuing operations in the consolidated statement of operations. Upon the implementation of SFAS No. 144 in 2002, the operating results of real estate
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assets held for sale and real estate assets sold will be included in discontinued operations in the consolidated statement of operations.
REVENUE RECOGNITION
Rental -- Residential properties are leased under operating leases with terms of generally one year or less. Rental income is recognized when earned, which is not materially different from revenue recognition on a straight line basis.
Property management and landscaping services -- Income is recognized when earned for property management and landscaping services provided to third parties.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, all investments purchased with an original maturity of three months or less are considered to be cash equivalents.
RESTRICTED CASH
Restricted cash generally is comprised of resident security deposits for communities located in Florida and Tennessee and required maintenance reserves for communities located in DeKalb County, Georgia.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized using the interest method over the terms of the related debt.
PER UNIT DATA
Basic earnings per Common Unit with respect to the Operating Partnership for the years ended December 31, 2001, 2000 and 1999 is computed based upon the weighted average number of Common Units outstanding during the period. Diluted earnings per Common Unit is based upon the weighted average number of Common Units outstanding during the period and includes the effect of the potential issuance of additional Units if stock options were exercised or converted into common stock of the Company.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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2. DEFERRED CHARGES
Deferred charges consist of the following:
3. NOTES PAYABLE
At December 31, 2001 and 2000, the Operating Partnership's indebtedness consisted of the following:
(1) All outstanding indebtedness can be prepaid at any time, subject to certain prepayment penalties. (2) Contains $100,000 of Mandatory Par Put Remarketed Securities. The annual interest rate on these securities to 2005 (the "Remarketing Date") is 6.85%. On the Remarketing Date, they are subject to mandatory tender for remarketing. (3) Represents stated rate. Stated rate increased to LIBOR plus 0.85% in 2002. At December 31, 2001, the outstanding balance of the Revolver consisted of "money market" loans with an average interest rate of 2.46%. (4) This loan is interest free for the first three years, with interest at 5.00% thereafter. (5) In 2000, interest rate was fixed at 6.975%, inclusive of credit enhancement and other fees, to 2009 through an interest rate swap arrangement. (6) This note bears interest at 6.50% with an effective rate of 7.30%. (7) FNMA credit enhanced bond indebtedness. Interest based on FNMA "AAA" tax exempt rate plus credit enhancement and other fees of 0.639%. Interest rate represents rate at December 31, 2001 before credit enhancements. The Operating Partnership has outstanding interest rate cap arrangements that limit the Operating Partnership's exposure to increases in the base interest rate to 5%.
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SENIOR AND MEDIUM TERM NOTES
In 2001, the Operating Partnership issued $50,000 of 6.71% senior unsecured notes due in 2006. The net proceeds from the notes were used to repay outstanding indebtedness. In 2001, the Operating Partnership repaid the outstanding balance of one medium term note issuance totaling $37,000 and one senior note issuance totaling $30,000 at their scheduled maturing dates. All of the unsecured notes are subject to certain covenants, including those governing the Operating Partnership's interest and fixed charge coverage and total leverage.
DEBT MATURITIES
The aggregate maturities of the Operating Partnership's indebtedness are as follows (1):
(1) Excludes outstanding balances on lines of credit, discussed below.
UNSECURED LINES OF CREDIT
The Operating Partnership utilizes a $320,000 three-year syndicated revolving line of credit (the "Revolver"), for its short-term financing requirements. At December 31, 2001, the stated interest rate for the Revolver was LIBOR plus 0.75% or prime minus 0.25%. Subsequent to year end, the stated rate increased to LIBOR plus 0.85% as a result of a credit rating agency downgrade on the Operating Partnership's senior unsecured debt. The Revolver provides for the rate to be adjusted up or down based on changes in the credit ratings on the Operating Partnership's senior unsecured debt. The Revolver also includes a money market competitive bid option for short-term funds up to $160,000 at rates below the stated line rate. The credit agreement for the Revolver contains customary representations, covenants and events of default, including covenants which restrict the ability of the Operating Partnership to make distributions, in excess of stated amounts, which in turn restrict the discretion of the Company to declare and pay dividends. In general, during any fiscal year the Operating Partnership may only distribute up to 100% of the Operating Partnership's consolidated income available for distribution (as defined in the credit agreement) exclusive of distributions of up to $30,000 of capital gains for such year. The credit agreement contains exceptions to these limitations to allow the Operating Partnership to make distributions necessary to allow the Operating Partnership to maintain its status as a REIT. The Company does not anticipate that this covenant will adversely affect the ability of the Operating Partnership to make distributions, or the Company to declare dividends, under the Company's current dividend level. The Revolver matures in April 2004.
The Operating Partnership also has in place an additional $185,000 line of credit facility for general corporate purposes. This line, with an annual renewal, matures in April 2002 and carries terms substantially equal to the Revolver. The Operating Partnership expects to renew this credit facility, although the total capacity and terms may vary.
Additionally, the Operating Partnership has a $20,000 unsecured line of credit with Wachovia Bank of Georgia, N.A. (the "Cash Management Line"). The Cash Management Line bears interest at LIBOR plus 0.75% or prime minus .25% and matures in February 2003. Management believes the Cash Management Line will be renewed at maturity with similar terms.
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INTEREST PAID
Interest paid (including capitalized amounts of $22,124, $25,426 and $21,417 for the years ended December 31, 2001, 2000 and 1999, respectively), aggregated $82,383, $74,419 and $51,337 for the years ended December 31, 2001, 2000 and 1999, respectively.
PLEDGED ASSETS
The aggregate net book value at December 31, 2001 of property pledged as collateral for indebtedness amounted to approximately $457,038.
EXTRAORDINARY ITEM
The extraordinary losses for the years ended December 31, 2001 and 1999 of $88 and $521, respectively, resulted from costs associates with the early extinguishment of indebtedness.
4. INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ENTITIES
In 2001, the Operating Partnership contributed two apartment communities under development in Atlanta, Georgia and one apartment community in Pasadena, California to individual limited liability companies (the "Property LLCs") with an institutional investor. The Operating Partnership holds a 35% equity interest in the Property LLCs. The total estimated development cost of the apartment communities of $144,000 is being funded through member equity contributions proportionate to the members' ownership interests and through construction financing provided by the Operating Partnership. No gain or loss was recognized on the Operating Partnership's contribution to the Property LLCs. The Operating Partnership provides real estate services (development, construction and property management) to the Property LLCs. The Operating Partnership accounts for its investments in these Property LLCs using the equity method of accounting. The excess of the Operating Partnership's investment over it's equity in the underlying net assets of the Property LLC's was approximately $3,123 at December 31, 2001. This excess investment will primarily be amortized as a reduction to earnings on a straight-line basis over the lives of the related assets.
The operating results of the Operating Partnership include its proportionate share of net income (loss) from the investments in the Property LLCs. A summary of financial information for the Property LLCs in the aggregate is as follows:
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At December 31, 2001, two of the apartment communities had commenced initial rental operations. The third community was under construction with an anticipated completion date in 2002. The Operating Partnership's share of the net loss from these investments is included in other revenue in the accompanying consolidated financial statements.
The Operating Partnership has committed construction financing to the Property LLCs totaling $111,271 ($77,019 funded at December 31, 2001). These loans earn interest at LIBOR plus 1.75% and are secured by the apartment communities. The loans mature on dates ranging from February 2003 to February 2004 and are expected to be repaid from the proceeds of permanent project financings. A portion of the construction loan financing from the Operating Partnership totaling approximately $50,062 represents an obligation of the institutional investor member of the Property LLCs.
As part of the development and construction services agreements entered into between the Operating Partnership and the Property LLCs, the Operating Partnership guaranteed the maximum total amount for certain construction cost categories subject to aggregate limits (approximately $14,000). At December 31, 2001, the Operating Partnership's estimated obligations under the agreements total approximately $900. If the Operating Partnership is unsuccessful in mitigating these estimated costs, the Operating Partnership will be required to fund the amounts to the Property LLCs. Any amounts funded will be accounted for as part of the Operating Partnership's investment in the Property LLCs. Additionally, under these agreements, the Operating Partnership is subject to project completion requirements, as defined. At December 31, 2001, the Operating Partnership believes that it will meet the completion date requirements and not be subject to any additional costs.
5. REAL ESTATE ASSETS HELD FOR SALE AND ASSET DISPOSITIONS
The Operating Partnership classifies real estate assets as held for sale after the approval of its internal investment committee and after the Operating Partnership has commenced an active program to sell the assets. At December 31 2001, the Operating Partnership has classified two apartment communities, six tracts of land and one commercial property as held for sale. These real estate assets are reflected in the accompanying consolidated balance sheet at $39,419 which represented the lower of cost or fair value less costs to sell. The Operating Partnership expects the sale of these assets to occur in 2002.
For the years ended December 31, 2001, 2000 and 1999, the consolidated statements of operations include net income of $4,071, $4,019 and $3,940, respectively, from communities held for sale at December 31, 2001. For the year ended December 31, 2001, depreciation expense of $844 was recognized on these assets prior to the date of held for sale classification.
In 2001, the Operating Partnership sold six apartment communities containing 2,799 units for net proceeds of approximately $210,443. The communities sold were located in Atlanta, Georgia, Dallas Texas and Nashville, Tennessee. Additionally, the Operating Partnership sold land parcels in Dallas, Texas, Denver, Colorado and Charlotte, North Carolina and a commercial property in Dallas, Texas for aggregate net proceeds of $9,679. These sales resulted in net gains of approximately $16,365. For the year ended December 31, 2001, the aggregate net gain on the sale of assets of $23,942 included the impact of the estimated net losses totaling $11,490 on the write down to fair value of assets designated as held for sale at December 31, 2001 and excluded realized losses totaling $19,067 related to assets written down to their estimated fair value at December 31, 2000.
In 2000, the Operating Partnership sold eight apartment communities containing 1,984 units for net proceeds of approximately $157,265, resulting in net gains of approximately $24,266. The communities sold were located in Atlanta, Georgia, Jackson, Mississippi and Nashville, Tennessee. For the year ended December 31, 2000, the aggregate net gain on the sale of assets of $3,208 included the estimated net losses totaling $21,058 on the write down to fair value of assets designated as held for sale at December 31, 2000.
In 1999, the Operating Partnership sold one apartment community containing 198 units and other land parcels for net proceeds of approximately $16,587, resulting in a net loss of $1,522.
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6. PARTNERS' EQUITY
PREFERRED UNITS
At December 31, 2001, the Operating Partnership had outstanding four separate series of cumulative redeemable preferred partnership units as more fully described below. The preferred partnership units are reflected in the accompanying financial statements at their liquidation value.
At December 31, 2001 and 2000, the Operating Partnership had outstanding 4,900,000 and 5,000,000, respectively, 8.5% Series A cumulative redeemable preferred partnership units (the "Series A Preferred Units"). The Series A Preferred Units have a liquidation preference of $50.00 per unit and are redeemable at the option of the Operating Partnership on or after October 1, 2026, at a redemption price of $50.00 per unit. The Series A Preferred Units are owned by the Company.
The Operating Partnership has outstanding 2,000,000, 7.625% Series B cumulative redeemable preferred partnership units (the "Series B Preferred Units"). The Series B Preferred Units have a liquidation preference of $25.00 per unit and are redeemable at the option of the Operating Partnership on or after October 28, 2007, at a redemption price of $25.00 per unit. The Series B Preferred Units are owned by the Company.
The Operating Partnership has outstanding 2,000,000, 7.625% Series C cumulative redeemable preferred partnership units (the "Series C Preferred Units"). The Series C Preferred Units have a liquidation preference of $25.00 per unit and are redeemable at the option of the Operating Partnership on or after February 9, 2003, at a redemption price of $25.00 per unit. The Series C Preferred Units are owned by the Company.
The Operating Partnership has outstanding 2,800,000, 8% Series D cumulative redeemable preferred partnership units (the "Series D Preferred Units"). The Series D Preferred Units have a liquidation preference of $25.00 per unit and are redeemable by the Operating Partnership on or after September 3, 2004, at a redemption price of $25.00 per unit. The Series D Preferred Units are exchangeable into authorized, but unissued Series D Preferred Stock of the Company, with identical terms and preferences, on or after September 2, 2009, at the option of the holders. Under certain circumstances, as defined in the agreement, the Series D Preferred Units may become exchangeable on or after September 3, 2002, at the option of the holders.
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COMPUTATION OF EARNINGS PER COMMON UNIT
For the years ended December 31, 2001, 2000 and 1999, basic and diluted earnings per Common Unit for income before extraordinary item, net of preferred dividends, and net income available to common unitholders before cumulative effect of accounting change and extraordinary item has been computed as follows:
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7. PROJECT ABANDONMENT, EMPLOYEE SEVERANCE AND IMPAIRMENT CHARGES
The Operating Partnership recorded project impairment and abandonment, employee severance and asset impairment charges for the years ended December 31, 2001 and 2000. The charges are summarized as follows:
In the fourth quarter of 2001, the Operating Partnership recorded charges totaling $17,450. These charges, precipitated by the sharp decline in economic and market conditions, reflect management's decision to focus its business and new development strategy on fewer markets, to focus on its core business of owning, developing and managing multifamily real estate assets and to do so with a smaller workforce and lower overhead expenses. The project impairment charge of $8,122 represents reserves on certain predevelopment and transaction pursuit costs in markets the Operating Partnership will no longer pursue for development opportunities and for certain projects that will no longer be pursued due to economic and market conditions. The employee severance charge of $3,560 is primarily for severance costs related to approximately a 100 person senior management and staff workforce reduction plan initiated and completed in the fourth quarter of 2001. The asset impairment and disposition charge includes a loss of $2,831 related to the disposition of the Operating Partnership's corporate aircraft, a loss of $452 on the sale of the Operating Partnership's third party landscape business discussed more fully below, impairment charges of $1,000 related to the Operating Partnership's exit from the for-sale housing business in all markets and the write down to estimated market value of certain internet and technology investments of $1,485.
At December 31, 2001, approximately $3,632 of these charges, primarily employee severance costs, remained as an accrued liability on the consolidated balance sheet. These amounts are expected to be paid in 2002.
In the fourth quarter of 2001, the Operating Partnership sold substantially all of the net assets of Post Landscape Group, Inc., a subsidiary entity that provided landscape maintenance, design and installation services to third parties, and RAM Partners, Inc., a separate subsidiary entity that managed apartment communities for third parties. These businesses were sold to members of the respective former management teams of the subsidiaries. The Operating Partnership financed 100% of the sales price of $5,767 (adjusted for working capital transfers at closing) through purchase money notes with interest of 9%. The notes require periodic interest, annual principal and balloon principal payments in 2006. The notes can be extended for two one-year periods. Under generally accepted accounting principles, the transactions have not been recorded as sales at December 31, 2001, and will not be recorded as sales until the conditions for sale recognition, primarily the receipt of an adequate down payment on the notes, are met. Until these transactions are recognized as sales, the book value of the assets and liabilities of these business are included in the Operating Partnership's consolidated balance sheet. Any collections under the notes will reduce the carrying value of the assets. The sale of the Post Landscape Group resulted in a loss of $452. Under generally accepted accounting principles, this loss was recognized in 2001 and included in the project abandonment, employee severance and impairment charges discussed above. The sale of RAM Partners will result in a gain of approximately $591, which will be recognized when the conditions for full sale recognition are met (expected in 2002).
In the fourth quarter of 2000, the Operating Partnership recorded charges of $9,365. These charges reflect management's decision to restrict its development activities to fewer markets, refine its development investment and for-sale housing strategies and make changes in its executive management team. Project abandonment charges totaling $4,389 related to the write off of predevelopment and pursuit costs in markets in which the Operating Partnership will no longer pursue development opportunities and on certain proposed development deals not meeting management's revised development strategy. Employee severance charges related to the termination costs of four executive positions and five staff personnel in the Operating Partnership's Dallas, Texas regional office. The asset impairment charge of $1,910 includes a charge of $1,503 related to the write off of the Operating
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Partnership's investment in a high speed internet provider that filed for bankruptcy protection and a charge of $407 related to the exit from the for-sale housing business in certain markets. As of December 31, 2001, all of the 2000 charges had been paid.
8. INCOME TAXES
Income or losses of the Operating Partnership are allocated to the partners of the Operating Partnership for inclusion in their respective income tax returns. Accordingly, no provisions or benefit for income taxes has been made in the accompanying financial statements. The Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code") commencing with the taxable year ended December 31, 1993. In order for the Company to qualify as a REIT, it must distribute 90% of its REIT taxable incomes, as defined in the Code, to its shareholders and satisfy certain other requirements. The Operating Partnership intends to make sufficient cash distributions to the Company to enable it to meet its annual REIT distribution.
The Operating Partners utilizes taxable subsidiaries to perform such activities as asset management, leasing and landscape services for third parties. These taxable subsidiaries are subject to federal, state and local income taxes. For the three years in the period ended December 31, 2001, the impact of these taxable subsidiaries' income taxes and their related tax attributes were not material to the accompanying consolidated financial statements
As of December 31, 2001, the net basis for Federal income tax purposes, taking into account the special allocation of gain to the partners contributing property to the Operating Partnership was lower that the net assets as reported in the Operating Partnership's consolidated financial statements by $6,640.
9. STOCK-BASED COMPENSATION PLANS
STOCK COMPENSATION PLANS
At December 31, 2001, the Company had two stock-based compensation plans, the Employee Stock Plan (the "Stock Plan"), the Employee Stock Purchase Plan (the "ESPP") and, under the Stock Plan, a stock grant program (the "Grant Plan") as described below. The Operating Partnership applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its plans. Accordingly, based upon the criteria of APB Opinion 25 no compensation cost is required to be recognized for the Stock Plan and the ESPP. The compensation cost which is required to be charged against income for the Grant Plan, was $112, $138 and $205 for 2001, 2000 and 1999, respectively. Had compensation cost for the Stock Plan and ESPP been determined based on the fair value at the grant dates for awards under the Plans consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Operating Partnership's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
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For purposes of the pro forma presentation, the fair value of each option grant is estimated as of the date of grant using the Black-Scholes option-pricing model. The weighted-average of all assumptions used in the calculation for various grants under all of the Company's plans during 2001, 2000 and 1999 are as follows:
EMPLOYEE STOCK PLAN
Under the Stock Plan, the Company may grant to its employees and directors options to purchase up to 6,000,000 shares of common stock. Of this amount, 550,000 shares are available for grants of restricted stock. Options granted to any key employee or officer cannot exceed 100,000 shares a year (500,000 shares if such key employee or officer is a member of the Company's Executive Committee). The exercise price of each option may not be less than the market price on the date of grant and all options have a maximum term of ten years from the grant date.
A summary of the status of stock option activity under the Stock Plan as of December 31, 2001, 2000 and 1999, is presented below:
At December 31, 2001, the range of exercise prices for options outstanding was $27.625 - $44.125 and the weighted-average remaining contractual life was 6 years.
In 2001, under its existing Stock Plan, the Company granted 17,566 shares of restricted stock to company officers. The restricted shares vest ratably over a five-year period. The total value of the restricted share grants of $644 was initially reflected in partners' equity as additional capital reduced by non-amortized deferred compensation expense. Such deferred compensation is amortized ratably into compensation expense over the vesting period.
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10. EMPLOYEE BENEFIT PLANS
Through a plan adopted by the Company, the employees of the Operating Partnership are participants in a defined contribution plan pursuant to Section 401 of the Internal Revenue Code. Beginning in 1996, Operating Partnership contributions, if any, to this plan are based on the performance of the Company and the Operating Partnership and are allocated to each participant based on the relative contribution of the participant to the total contributions of all participants. For purposes of allocating the Operating Partnership contribution, the maximum employee contribution included in the calculation is 3% of salary. Operating Partnership contributions of $638, $514 and $346 were made in 2001, 2000 and 1999, respectively.
The Company maintains an Employee Stock Purchase Plan ("ESPP") to encourage stock ownership by eligible directors and employees. To participate in the ESPP, (i) directors must not be employed by the Company or the Operating Partnership and must have been a member of the Board of Directors for at least one month and (ii) an employee must have been employed full or part-time by the Company or the Operating Partnership for at least one month. The purchase price of shares of Common Stock under the ESPP is equal to 85% of the lesser of the closing price per share of Common Stock on the first or last day of the trading period, as defined.
11. COMMITMENTS AND CONTINGENCIES
LAND, OFFICE AND EQUIPMENT LEASES
The Operating Partnership is party to two ground leases with terms expiring in years 2040 and 2043 relating to a single operating community, one ground lease expiring in 2038 for a second operating community, three ground leases expiring in 2066, 2069 and 2074 for three communities under development and to office, equipment and other operating leases with terms expiring in years 2001 through 2004. Future minimum lease payments for non-cancelable land, office, equipment and other leases at December 31, 2001, are as follows:
The Operating Partnership incurred $5,998, $5,935 and $5,109 of rent expense for the years ended December 31, 2001, 2000 and 1999, respectively.
CONTINGENCIES
The Operating Partnership is party to various legal actions which are incidental to its business. Management believes that these actions will not have a material adverse affect on the consolidated balance sheets and statements of operations.
12. RELATED PARTY TRANSACTIONS
In 2001, the Operating Partnership invested in three Property LLCs that are accounted for under the equity method of accounting (see Note 4). In 2001, the Operating Partnership recorded development fees, general construction contract billings, management fees and expense reimbursements (primarily personnel costs) of approximately $15,202 from these related companies. Additionally in 2001, the Operating Partnership earned interest under the construction loans to the Project LLCs totaling $1,024.
The Operating Partnership provides landscaping services for executive officers, employees, directors and other related parties. For the years ended December 31, 2001, 2000 and 1999, the Operating Partnership received landscaping revenue of $ 705, $667 and $610 for such services. Such revenue includes reimbursement of direct and indirect expenses. Additionally, the Operating Partnership provides accounting and administrative services to entities controlled by certain executive officers of the Operating Partnership. Fees under this arrangement aggregated $25 for each year ended December 31, 2001, 2000 and 1999, respectively. Also, the Operating Partnership was contracted to assist in the development of apartment complexes constructed by a former
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executive and current unitholder. Fees under this arrangement were $7, $29 and $100 for the years ended December 31, 2001, 2000 and 1999, respectively.
In 2001, 2000 and 1999, the Operating Partnership loaned $2,500, $1,500 and $7,750, respectively, to certain executives. These loans are payable ten years from the issue date and bear interest at a rate of 6.32% per annum. Proceeds from these loans were used by these executives to acquire the Company's common shares on the open market. As of December 31, 2001, $2,500 of the loans have been repaid. Additionally, in 2001, the Operating Partnership loaned $1,300 to certain executives. The loans bear interest at 6.32% per annum. If the executives continue to be employed by the Operating Partnership, the loans will be forgiven annually over five to ten year periods, as defined in the agreements. The annual loan forgiveness of $160 is recorded as compensation expense.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were determined by management using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Operating Partnership could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash equivalents, rents and accounts receivables, accounts payable, accrued expenses, agreements and other liabilities are carried at amounts which reasonably approximate their fair values because of the short-term nature of these investments. The fair value of fixed rate debt was approximately $847,563 (carrying value of $807,238) and the fair value of floating rate debt approximated its carrying value due to the adjustable nature of the arrangements at December 31, 2001.
In order to manage the impact of interest rate changes on earnings and cash flow, the Operating Partnership entered into and has outstanding interest rate swap and interest rate cap arrangements. As more fully described in Note 1, the fair values of these interest rate cap and interest rate swap agreements are carried on the consolidated balance sheet at fair market value in accordance with SFAS No. 133. At December 31, 2001, the carrying amounts related to these arrangements represented net liabilities totaling approximately $6,630.
Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 2001. Although management is not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.
14. SEGMENT INFORMATION
SEGMENT DESCRIPTION
In accordance with SFAS No. 131, "Disclosure About the Segments of an Enterprise and Related Information," the Operating Partnership presents segment information based on the way that management organizes the segments within the enterprise for making operating decisions and assessing performance. The segment information is prepared on substantially the same basis as the internally reported information used by the Operating Partnership's chief operating decision makers to manage the business.
The Operating Partnership's chief operating decision makers focus on the Operating Partnership's primary sources of income from property rental operations. Property rental operations are broken down into five segments based on the various stages in the property ownership lifecycle. These segments are described below. All other ancillary service and support operations, including the third party service businesses (see Note 7), are aggregated in the accompanying segment information.
- Fully stabilized communities - those apartment communities which have been stabilized (the earlier of the point at which a property reaches 95% occupancy or one year after completion of construction) for both the current and prior year.
- Communities stabilized during 2000 - communities which reached stabilized occupancy in the prior year.
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- Development and lease up communities - those communities that are in lease-up but were not stabilized by the beginning of the current year, including communities that stabilized during the current year.
- Communities held for sale - those communities that are being marketed for sale.
- Sold communities - communities which were sold in the current or prior year.
SEGMENT PERFORMANCE MEASURE
Management uses contribution to funds from operations ("FFO") as the performance measure for its segments. Effective January 1, 2000, FFO is defined by the National Association of Real Estate Investment Trusts as net income available to common unitholders determined in accordance with generally accepted accounting principles ("GAAP"), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real estate assets, and after adjustment for unconsolidated partnerships and joint ventures. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Operating Partnership's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Operating Partnership's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Operating Partnership's needs.
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POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
SEGMENT INFORMATION
The following table reflects each segment's contribution to consolidated revenues and FFO together with a reconciliation of segment contribution to FFO, total FFO and income before extraordinary item and preferred dividends. Additionally, substantially all of the Operating Partnership's assets relate to the Operating Partnership's property rental operations. Asset cost, depreciation and amortization by segment are not presented because such information at the segment level is not reported internally.
15. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities for the years ended December 31, 2001, 2000 and 1999 are as follows:
The Operating Partnership committed to distribute $32,741, $33,466 and $30,818 for the quarters ended December 31, 2001, 2000 and 1999, respectively.
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POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended 2001 and 2000 are as follows:
* The total of the four quarterly amounts for minority interest of unitholders in Operating Partnership, extraordinary item, net income and earnings per unit may not equal the total for the year. These differences result from the use of a weighted average to compute minority interest in the Operating Partnership and average number of units outstanding.
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POST PROPERTIES, INC. REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION DECEMBER 31, 2001 (DOLLARS IN THOUSANDS)
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POST PROPERTIES, INC. REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION DECEMBER 31, 2001 (DOLLARS IN THOUSANDS)
Post Properties, Inc. 87 Post Apartment Homes, L.P.
POST PROPERTIES, INC. REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION DECEMBER 31, 2001 (DOLLARS IN THOUSANDS)
(1) The aggregate cost for Federal Income Tax purposes to the Company was approximately $2,383,405 at December 31, 2001, taking into account the special allocation of gain to the partners contributing property to the Operating Partnership. (2) These properties serve as collateral for the Federal National Mortgage Association credit enhancement. (3) Balance includes an allowance for possible loss of $3,700 which was taken in prior years. (4) Construction still in process as of December 31, 2001. (5) Additional land was acquired for construction of a second phase. (6) These properties are currently held for sale. If required, the carrying value of the assets has been adjusted based on management's best estimate of the expected proceeds from sales.
A summary of activity for real estate investments and accumulated depreciation is as follows:
(a) Excludes investments in and advances to unconsolidated entities in the amount of $89,692.
(b) Accumulated depreciation on the balance sheet is net of accumulated depreciation on assets held for sale in the amounts of $11,260 and 12,059, for the years ended December 31, 2001 and 2000, respectively.
Post Properties, Inc. 88 Post Apartment Homes, L.P.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Participants and Administrator of the Post Properties, Inc. 1995 Non-Qualified Employee Stock Purchase Plan
In our opinion, the accompanying statements of net assets available for plan benefits and of changes in net assets available for plan benefits present fairly, in all material respects, the net assets of the Post Properties, Inc. 1995 Non-Qualified Employee Stock Purchase Plan at December 31, 2001 and 2000 and the changes in net assets available for plan benefits for the years then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Plan's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Atlanta, Georgia March 5, 2001
Post Properties, Inc. 89 Post Apartment Homes, L.P.
POST PROPERTIES, INC. 1995 NON-QUALIFIED EMPLOYEE STOCK PURCHASE PLAN STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
Post Properties, Inc. 90 Post Apartment Homes, L.P.
POST PROPERTIES, INC. 1995 NON-QUALIFIED EMPLOYEE STOCK PURCHASE PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
Post Properties, Inc. 91 Post Apartment Homes, L.P.
POST PROPERTIES, INC.
1995 NON-QUALIFIED EMPLOYEE STOCK PURCHASE PLAN NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Post Properties, Inc. (the "Company") established the 1995 Non-Qualified Employee Stock Purchase Plan (the "Plan") to encourage stock ownership by eligible directors and employees.
(B) The financial statements have been prepared on the accrual basis of accounting.
(C) All expenses incurred in the administration of the Plan are paid by the Company and are excluded from these financial statements.
NOTE 2 - THE PLAN
The Plan became effective as of January 1, 1995. Under the Plan, eligible participating employees and directors of the Company can purchase Common Stock at a discount (up to 15% as set by the Compensation Committee of the Company's Board of Directors) from the Company through salary withholding or cash contributions. The Plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974, nor is it intended to qualify for special tax treatment under Section 401(a) of the Internal Revenue Code.
Directors who have been a member of the Board of Directors for at least one full calendar month and full-time employees who have been employed a full calendar month are eligible to participate in the Plan. Eligible directors and employees (the "Participants") may contribute in cash or as a specified dollar amount or percentage of their compensation to the Plan. The minimum payroll deduction for a Participant for each payroll period for purchases under the Plan is $10.00. The maximum contribution which a Participant can make for purchases under the Plan for any calendar year is $100,000. All contributions to the Plan are held in the general assets of Post Apartment Homes, L.P., the Company's operating partnership.
Shares of the Company's Common Stock are purchased by an investment firm semi-annually after the end of each six-month period, as defined, and credited to each Participant's individual account. The purchase price of the Common Stock purchased pursuant to the Plan is currently equal to 85% of the closing price on either the first or last trading day of each purchase period, whichever is lower.
All Common Stock of the Company purchased by Participants pursuant to the Plan may be voted by the Participants or as directed by the Participants.
The Plan does not discriminate, in scope, terms, or operation, in favor of officers or directors of the Company and is available, subject to the eligibility rules of the Plan, to all employees of the Company on the same basis.
NOTE 3 - FEDERAL INCOME TAXES
The Plan is not subject to Federal income taxes. The difference between the fair market value of the shares acquired under the Plan, and the amount contributed by the Participants is treated as ordinary income to the Participants' for Federal income tax purposes. Accordingly, the Company withholds all applicable taxes from the employee contributions. The fair market value of the shares is determined as of the stock purchase date.
Post Properties, Inc. 92 Post Apartment Homes, L.P.
3. Exhibits
Certain of the exhibits required by Item 601 of Regulation S-K have been filed with previous reports by the registrant and are herein incorporated by reference thereto.
The Registrants agree to furnish a copy of all agreements relating to long-term debt upon request of the Commission.
Post Properties, Inc. 93 Post Apartment Homes, L.P.
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(a) Filed as an exhibit to the Registration Statement on Form S-11 (SEC File No. 33-61936), as amended, of the Company. (b) Filed as an exhibit to the Current Report on Form 8-K, dated as of October 1, 1996, of the Company. (c) Filed as an exhibit to the Current Report on Form 8-K, dated as of October 28, 1997, of the Company. (d) Filed as an exhibit to the Current Report on Form 8-K, dated as of February 9, 1998, of the Company. (e) Filed as an exhibit to the Quarterly Report on Form 10-Q, dated as of November 15, 1999, of the Company. (f) Filed as an exhibit to the Registration Statement on Form S-3 (SEC File No. 333-42884) of the Company. (g) Filed as an exhibit to the Annual Report on Form 10-K of the Company for the year ended December 31, 1997. (h) Filed as an exhibit to the Registration Statement on Form S-11 (SEC File No. 33-71650), as amended, of the Company. (i) Filed as an exhibit to the Registration Statement on Form S-8 (SEC File No. 33-86674) of the Company. (j) Filed as part of the Registration Statement on Form S-3 (SEC File No. 333-39461) of the Company. (k) Filed as an exhibit to the Annual Report on Form 10-K of the Registrants for the year ended December 31, 1998. (l) Filed as an exhibit to the Annual Report on Form 10-K of the Registrants for the year ended December 31, 1999. (m) Filed as an exhibit to the Annual Report on Form 10-K of the Registrants for the year ended December 31, 2000.
(b) Reports on Form 8-K
None
Post Properties, Inc. 94 Post Apartment Homes, L.P.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POST PROPERTIES, INC.
(Registrant)
/s/ David P. Stockert -------------------------------------------------------- March 28, 2002 David P. Stockert, President and Chief Operating Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Post Properties, Inc. 95 Post Apartment Homes, L.P.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POST APARTMENT HOMES, L.P. By: Post G.P. Holdings, Inc., as General Partner
/s/ David P. Stockert -------------------------------------------------------- March 28, 2002 David P. Stockert, President and Chief Operating Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Post Properties, Inc. 96 Post Apartment Homes, L.P.