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TEXT-S&P: Post Properties upgraded to 'BBB'
September 27, 2012 / 8:51 PM / in 5 years

TEXT-S&P: Post Properties upgraded to 'BBB'

Overview
     -- Multifamily housing fundamentals remain favorable in most of Post 
Properties' Sunbelt and Mid-Atlantic submarkets.
     -- We raised our corporate credit and senior unsecured debt ratings on 
the REIT to 'BBB' from 'BBB-' and revised the outlook to stable from positive.
     -- The rating actions acknowledge the company's strong operating 
performance and recently strengthened credit metrics, which we believe the 
company will sustain at current or stronger levels through future cycles.
     -- The stable outlook reflects our expectation for modest leverage and 
continued strengthening in cash flow and credit metrics over the next two 
years.
Rating Action
On Sept. 27, 2012, Standard & Poor's Ratings Services raised its corporate 
credit and senior unsecured debt ratings on Post Properties Inc. (Post)
to 'BBB' from 'BBB-'. At the same time, we raised our rating on Post's preferred
shares to 'BB+' from 'BB'. We also revised our ratings outlook to stable from 
positive. These actions affect roughly $280 million of rated debt and $43 
million of rated preferred stock (see list).
Rationale
The upgrade acknowledges Post's strong operating performance and recently 
strengthened credit metrics, which we believe the REIT will sustain at current 
or stronger levels through future business and development cycles. Post 
strengthened its credit metrics during the first half of 2012 by modestly 
reducing leverage, reporting strong organic growth, and refinancing maturing 
debt with lower-cost issuance. The company also continued to fund its recently 
expanded development pipeline predominantly with equity. We expect that 
maintenance of modest leverage and EBITDA contributions from the lease-up of 
development projects and organic growth, in tandem with potentially favorable 
debt refinancing opportunities, will further strengthen Post's cash flow and 
credit metrics over the next two years.

Our ratings on Post reflect the company's "satisfactory" business risk 
profile, which is characterized by a moderately sized portfolio of high-end 
apartment communities that is concentrated in predominantly favorable Sunbelt 
and Mid-Atlantic submarkets. Our satisfactory business risk profile assessment 
also acknowledges the company's recently expanded development pipeline; 
however, we believe the company's stated intention to continue funding this 
growth predominantly with proceeds from condo sales and equity partially 
mitigates this risk. We consider Post's financial risk profile "intermediate," 
based on modest leverage, adequate liquidity, and recently strengthened 
fixed-charge coverage (FCC).

Atlanta, Ga.-based Post is a $3.6 billion total market capitalization 
multifamily REIT, with interests in 59 communities containing 21,982 units, 
including partial (25%-35%) interests in four unconsolidated communities, 
containing 1,471 units. Post's portfolio is concentrated in mostly low-barrier 
Sunbelt and Mid-Atlantic markets, where single-family housing affordability is 
high and new multifamily supply risk is meaningful, in our view. Atlanta 
(25.7% of second quarter ended June 30, 2012 net operating income {NOI}), 
Washington, D.C. (19.5%), Dallas (19.2%), Tampa (10.7%), and Charlotte (6.2%) 
represent Post's largest markets. However, this concentration is partially 
mitigated by favorable submarket positions within its major markets and the 
high-end quality of Post's portfolio, which we believe caters more to a "rent 
by choice" demographic, than most competing product.

We believe Post intends to continue growing its portfolio via development 
(with a budgeted cost of up to 15% of assets) and to a lesser extent, via 
discretionary acquisitions within its existing geographic footprint. At second 
quarter-end, the company's development pipeline had a cost of $300 million, 
with $138 million left to complete. This pipeline included one community in 
Washington, D.C. ($89 million cost) in lease-up (20% leased), two communities 
in Austin and Houston ($63 million aggregate cost) with estimated delivery 
dates in third-quarter 2012, and two communities in Orlando and Raleigh ($114 
million aggregate cost) with estimated delivery dates in first-quarter 2013. 
We note that Post commenced a development project in Houston ($34 million 
cost) during the second quarter and acquired a three-year-old community (for 
$74 million) in Charlotte subsequent to second quarter-end. We believe Post 
may add up to two projects (in Atlanta, Dallas, Raleigh, or Tampa) to its 
current development pipeline over the next few quarters. The ramp up in 
development increases Post's business risk in our view. However, the expected 
size of the pipeline, the location of the projects (within existing core 
markets), and the nature of the funding (largely equity financed) partially 
mitigates this risk. 

Operating performance within Post's same-store portfolio remained strong 
during the second quarter, marked by 10.4% NOI growth, which modestly exceeded 
our expectation and the company's rated peer group average (7.0%). A 7.8% 
increase in same-store revenue (from a 100 basis point rise in average 
economic occupancy to 96.1% and 6.5% higher average monthly rent of $1,341 per 
unit) offset a 3.9% increase in same-store expense (predominantly from a 14.4% 
rise in real estate taxes and fees and 11.5% higher insurance expense). 
Same-store rent growth was strong (up 7%-9%) in all of Post's markets, except 
for Washington, D.C. (up 3.0%), which we believe is experiencing weakening 
economic conditions and New York (up 2.5%), where certain properties are 
subject to rent control provisions.

Post strengthened its credit metrics during the first half of 2012, in part, 
by modestly reducing leverage and refinancing $96 million 5.45% senior 
unsecured notes that came due with draws on its recently sourced $300 million 
term-loan (fixed-to maturity at 3.44%). Leverage, as defined by 
debt-plus-preferred stock-to-undepreciated real estate, dipped to 35% (from 
36% at year-end 2011), while debt-plus-preferred stock-to-annualized EBITDA 
declined to 5.7x (from 5.9x), and FCC strengthened to 2.9x (from 2.5x). We 
believe these metrics will continue to strengthen in a similar fashion over 
the next two years. 

Our revised base-case scenario analysis contemplates earlier-noted external 
growth and same-store NOI growth of 7.0% in 2012 and 5.0% in 2013. We also 
assume $189 million in aggregate consolidated debt (20% of total debt), which 
has a weighted average cost of 6.1% and matures in 2013, is refinanced at 
5.0%. Under this scenario, we estimate that debt-plus-preferred stock to 
EBITDA will remain below 6.0x and FCC will improve to above 3.0x next year. 
Under this scenario, we also estimate that coverage of all fixed charges 
(including the common dividend) will remain comfortably above 1.3x.

Liquidity
Post's liquidity profile is adequate, in our view. We base our assessment on 
the following:
     -- We believe the company's sources of liquidity will cover its 
nondiscretionary liquidity needs by 1.2x or more through 2013.
     -- As of July 27, 2012, Post had $39 million cash and cash equivalents 
and $329 million available on its combined $330 million unsecured revolvers 
that mature in 2016. We also estimate that the company will generate $130 
million-$140 million in annual funds from operations (FFO).
     -- Post faces a $130 million 6.30% senior unsecured note maturity in June 
2013 and has an estimated $138 million left to complete its current 
development pipeline. We also estimate that the company will annually incur 
$55 million-$65 million in common and preferred dividend distributions, $25 
million-$30 million in portfolio maintenance capital expenditures, and $4 
million in regularly scheduled principal amortization.
     -- We believe Post may fund the bulk of its external growth with proceeds 
from condominium unit sales ($40 million book value at second quarter-end) and 
common equity issued through its at-the-market equity programs (4.1 million 
share remaining on July 27, 2012); however, we do not incorporate this view 
into our liquidity assessment. As noted earlier, we believe the company could 
pursue additional discretionary investments through 2013. We also note that 
Post faces $53 million in nonrecourse mortgage balloon maturities through 2013.
     -- We believe Post would remain in compliance with the financial 
maintenance covenants governing its revolvers and unsecured bonds, if EBITDA 
were to decline by 15% from its current level.

Outlook
The stable outlook reflects our expectation that Post will continue to 
maintain modest leverage and strengthen its cash flow and credit metrics from 
the lease-up of development projects and organic growth, in tandem with 
potentially favorable debt refinancing opportunities, over the next two years. 
An upgrade is unlikely in the near-intermediate term, given the company's 
increased development appetite and higher portfolio concentration relative to 
larger, more diversified, higher-rated peers. At the same time, we see limited 
downside risk to the ratings, given our expectations for favorable 
fundamentals to continue. However, ratings would come under pressure if the  
company shifts its financial policy such that it materially deviates from our 
expectations, if EBITDA declines (perhaps because of a large development 
stumble) such that FCC drops below 2.5x, liquidity becomes constrained, or 
coverage of all fixed charges (including the common dividend) dips below 1.0x.
Related Criteria And Research
     -- Industry Economic And Ratings Outlook: North American REIT Ratings 
Will Likely Remain Stable Despite Slowing Economic Growth, July 27, 2012
     -- Issuer Ranking: North American REITs, Strongest To Weakest, July 26, 
2012
     -- Strong Rental Demand To Bode Well For U.S. Multifamily REITs, March 6, 
2012
     -- Credit FAQ: How Standard & Poor's Applies Its Liquidity Descriptors 
For Global Corporate Issuers To North American Real Estate Companies, Oct. 12, 
2011
     -- Key Credit Factors: Global Criteria For Rating Real Estate Companies, 
June 21, 2011
Ratings List
Upgraded; Outlook Action
                                        To                 From
Post Properties Inc.
Post Apartment Homes L.P.
 Corporate Credit Rating                BBB/Stable/--      BBB-/Positive/--

Post Apartment Homes L.P.
 Senior Unsecured                       BBB                BBB-

Post Properties Inc.
 Preferred Stock                        BB+                BB


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.

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