Neutral (PPS, $54.42)
Shares Trade at a Premium to Universe. Initiating with a Neutral Rating and a $47 Price Target
August 12, 2014
John R. Benda
Investment Conclusion. We are initiating coverage of Post Properties, Inc. (PPS) with a Neutral rating and $47 price target based on a blended net asset value (“NAV”), dividend discount model (DDM), and Price/Funds From Operations (“P/FFO”) valuation method. This Neutral rating is negatively biased not because of operational issues with PPS, rather due to a current valuation premium being unwarranted based on our assessment that the fundamentals do not support it. We feel that the market has overextrapolated recent dividend raises and driven shares up so that PPS currently yields 2.58%, a rate below the 10-year Treasury yield we add, as merely catch-up raises that other firms initiated years ago. Our price target is derived from an equally weighted blend of our $48.43 Net Asset Value (“NAV”) estimate, $45.21 Dividend Discount Model (“DDM”) estimate and $46.26 Price/Funds From Operations (“P/FFO”) model estimate. Our $47.00 price target implies an annual total return, including the current 2.9% dividend yield, of (10.5%) at the current stock price of $54.42.
Source: Capital IQ, National Securities Corporation Estimates
Dividend Raises Rallied Shares Past Fundamentals. Currently, PPS is trading at premiums to the entire MF Rental REIT on various core metrics, yet we believe the fundamentals do not justify them. For the group, the current P/NAV is a 0.96x average and 0.99x median value, yet PPS is trading at a 1.06x value. For the group, the current P/FFO valuation average is 16.52x coupled with a 16.71x median, yet PPS is trading at 21.66x. On May 23, 2013 and May 8, 2014 PPS announced two dividend raises that optically seem to be ahead of the peer average and have likely rallied the stock, but we note PPS’ last annual dividend is still below its $3.12 peak reached in 2002 and that PPS cut its dividend the most in our coverage group during the downturn.
Executing on Net Asset Sales and Pausing Portfolio Growth Until 2015. According to management on a recent earnings call, “Beyond working on the development projects that make sense, this year will be one of net asset sales. We are targeting to sell $200 million to $250 million of existing assets, with the proceeds reinvested primarily in a mix of debt reduction, special dividends and share buybacks.” We believe the MF rental...
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