Post Properties: Posting Profits
02/27/2004 12:00 am EST
While some may consider real estate investment trusts to be a rather staid sector, Barry Vinocur often finds REITs with developments that are as intriguing as any stock. His latest pick touches on growth, income, value, a turnaround, and new management.
"Over the past six weeks, we have spent a lot of hours digging into Post Properties (PPS NYSE), which prior to its descent into the fourth circle of hell, was once considered one of the best-of-the-best in all of REITland. That the wheels came off the wagon on Post isn’t news. That the company has struggled in recent years to right the ship–amid a bitterly fought and high-profile proxy fight last year–against the backdrop of the worst multi-family market fundamentals in decades–perhaps ever–also isn’t a secret to veteran REITsters. But money is rarely (if ever) made by gazing endlessly into the rear-view mirror. As a long-time believer in a carpe diem strategy, we believe the time is right to re-add Post Properties to our Recommended List.
"Before we set forth our case for Post, we want to stress–and underscore in capital letters–two things: 1) though PPS has what looks on the surface to be a juicy dividend yield, that’s not why it’s being added to our Recommended List. In fact, dyed-in-the-wool dividend die-hards aren’t the ones that should be looking hard at the company; and 2) though we’re high on Post, it isn’t a holding we would recommend for the faint-of-heart, since the only turnaround that is ever a sure thing–is the one adjudged so with the benefit of considerable hindsight.
"Our case for Post is relatively straightforward. First, we believe the company is one of very few REITs trading at a discount–modest though it may be by some estimates–to the underlying value of its real estate. (Keep in mind, however, that Post is de facto in a stealth liquidation mode as the company continues to pay a dividend that is well in excess of its current 'recurring' cash flow.) Second, now that Post founder John Williams has decided to sell his shares and ride off into the sunset (to begin a new venture), the prospect of a 2004 redux of last year’s bitter proxy fight is off our radar screen. Third, our view on CEO Dave Stockert is that not only is he an extremely bright and capable fellow who has gotten up to speed on multi-family quickly, but also that he’s an ethical guy, who is focused on creating value for all stakeholders.
"Fourth, and most important, is the pending addition of Doug Crocker to Post’s board. Though Crocker won’t officially join the Post board until May, sources tell us that Crocker was up to speed on the company before he accepted the offer to join the board, and that he’s been spending a lot of time reviewing the situation. Crocker is no stranger to REITsters from his stint at Equity Residential. However, as impressed as we were by Crocker during his years at EQR, it is Crocker’s skill at helping to engineer turnarounds that most intrigues us. Crocker knows real estate, but he really knows multi-family. No question, he will be a strong board member at Post. Moreover, sources tell us that Crocker doesn’t dive into these situations unless he not only sees an opportunity to right the ship, but also to make money. Said differently, what Crocker makes by investing in these companies far surpasses his director's fees. We believe that following his lead (though by no means risk-free) is likely to pay off very handsomely long-term."