UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

POST PROPERTIES, INC.
POST APARTMENT HOMES, L.P.

(Exact name of registrant as specified in its charter)

Georgia Georgia (State or other jurisdiction of incorporation or organization)		58-1550675 58-2053632 (I.R.S. Employer Identification No.)

4401 Northside Parkway, Suite 800, Atlanta, Georgia 30327
(Address of principal executive offices — zip code)

(404) 846-5000
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.

Post Properties, Inc.		Yes		þ		No		o
Post Apartment Homes, L.P.		Yes		þ		No		o

     Indicate by check mark whether the registrants are accelerated filers (as defined in Rule 12b-2 of the Exchange Act).

Post Properties, Inc.		Yes		þ		No		o
Post Apartment Homes, L.P.		Yes		þ		No		o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

40,225,565 shares of common stock outstanding as of August 5, 2005 (excluding treasury stock).

 

 

POST PROPERTIES, INC.
POST APARTMENT HOMES, L.P.

INDEX

		Page
Part I FINANCIAL INFORMATION
Item 1 Financial Statements
POST PROPERTIES, INC.
Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004			1
Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004			2
Consolidated Statement of Shareholders’ Equity and Accumulated Earnings for the six months ended June 30, 2005			3
Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004			4
Notes to Consolidated Financial Statements			5
POST APARTMENT HOMES, L.P.
Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004			17
Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004			18
Consolidated Statement of Partners’ Equity for the six months ended June 30, 2005			19
Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004			20
Notes to Consolidated Financial Statements			21
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			33
Item 3 Quantitative and Qualitative Disclosures about Market Risk			48
Item 4 Controls and Procedures			48
Part II OTHER INFORMATION			49
Item 1 Legal Proceedings			49
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			50
Item 3 Defaults Upon Senior Securities			50
Item 4 Submission of Matters to a Vote of Security Holders			50
Item 5 Other Information			50
Item 6 Exhibits			51
Signatures			52
Exhibit Index			54
EX-10.1 PURCHASE AND SALE AGREEMENT
EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
EX-32.1 SECTION 906, CERTIFICATION OF THE CEO
EX-32.2 SECTION 906, CERTIFICATION OF THE CFO

POST PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

		June 30,				December 31,
		2005				2004
		(Unaudited)
Assets
Real estate assets
Land		$	270,167			$	266,520
Building and improvements			1,824,414				1,887,514
Furniture, fixtures and equipment			208,348				214,954
Construction in progress			34,291				19,527
Land held for future development			51,972				18,910
			2,389,192				2,407,425
Less: accumulated depreciation			(489,812	)			(498,367	)
Assets held for sale, net of accumulated depreciation of $46,506 and $26,332 at June 30, 2005 and December 31, 2004, respectively			72,073				68,661
Total real estate assets			1,971,453				1,977,719
Investments in and advances to unconsolidated real estate entities			34,441				21,320
Cash and cash equivalents			4,169				123
Restricted cash			4,321				1,844
Deferred charges, net			13,462				15,574
Other assets			41,855				37,262
Total assets		$	2,069,701			$	2,053,842
Liabilities and shareholders’ equity
Indebtedness, including $47,500 and $34,060 of debt secured by assets held for sale at June 30, 2005 and December 31, 2004, respectively		$	1,111,936			$	1,129,478
Accounts payable and accrued expenses			74,407				58,837
Dividend and distribution payable			19,065				19,203
Security deposits and prepaid rents			9,905				7,236
Accrued interest payable			6,008				7,677
Total liabilities			1,221,321				1,222,431
Minority interest of common unitholders in Operating Partnership			41,687				43,341
Commitments and contingencies
Shareholders’ equity
Preferred stock, $.01 par value, 20,000 authorized:
8 1/2 % Series A Cumulative Redeemable Shares, liquidation preference $50 per share, 900 shares issued and outstanding			9				9
7 5/8 % Series B Cumulative Redeemable Shares, liquidation preference $25 per share, 2,000 shares issued and outstanding			20				20
Common stock, $.01 par value, 100,000 authorized:
40,372 and 40,164 shares issued, 40,035 and 40,164 shares outstanding at June 30, 2005 and December 31, 2004, respectively			403				401
Additional paid-in capital			779,907				775,221
Accumulated earnings			48,330				25,075
Accumulated other comprehensive income (loss)			(6,840	)			(8,668	)
Deferred compensation			(4,055	)			(3,988	)
			817,774				788,070
Less common stock in treasury, at cost, 337 and 0 shares at June 30, 2005 and December 31, 2004, respectively			(11,081	)			—
Total shareholders’ equity			806,693				788,070
Total liabilities and shareholders’ equity		$	2,069,701			$	2,053,842

The accompanying notes are an integral part of these consolidated financial statements.

POST PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

		Three months ended								Six months ended
		June 30,								June 30,
		2005				2004				2005				2004
Revenues
Rental		$	68,744			$	65,827			$	136,471			$	130,779
Other property revenues			4,316				3,986				8,098				7,646
Other			61				47				132				122
Total revenues			73,121				69,860				144,701				138,547
Expenses
Property operating and maintenance (exclusive of items shown separately below)			32,973				30,621				65,766				61,093
Depreciation			19,414				19,689				38,946				39,312
General and administrative			5,433				5,476				10,728				10,119
Development costs and other			740				381				1,837				916
Total expenses			58,560				56,167				117,277				111,440
Operating Income			14,561				13,693				27,424				27,107
Interest income			189				213				354				393
Interest expense			(15,206	)			(15,942	)			(30,885	)			(31,362	)
Amortization of deferred financing costs			(1,029	)			(1,092	)			(2,717	)			(2,208	)
Equity in income of unconsolidated real estate entities			553				207				701				422
Gain on sale of technology investment			—				—				5,267				—
Minority interest in consolidated property partnerships			64				248				178				432
Minority interest of preferred unitholders			—				(1,400	)			—				(2,800	)
Minority interest of common unitholders			159				365				200				964
Income (loss) from continuing operations			(709	)			(3,708	)			522				(7,052	)
Discontinued operations
Income from discontinued operations, net of minority interest			1,529				4,137				4,637				9,381
Gains on sales of real estate assets, net of minority interest and provision for income taxes			58,919				104,530				59,258				106,039
Loss in early extinguishment of indebtedness associated with property sales, net of minority interest			(1,296	)			(3,849	)			(1,296	)			(3,849	)
Income from discontinued operations			59,152				104,818				62,599				111,571
Net income			58,443				101,110				63,121				104,519
Dividends to preferred shareholders			(1,909	)			(1,909	)			(3,819	)			(4,507	)
Redemption costs on preferred stock			—				—				—				(1,716	)
Net income available to common shareholders		$	56,534			$	99,201			$	59,302			$	98,296
Per common share data — Basic
Loss from continuing operations (net of preferred dividends and redemption costs)		$	(0.07	)		$	(0.14	)		$	(0.08	)		$	(0.34	)
Income from discontinued operations			1.48				2.63				1.56				2.82
Net income available to common shareholders		$	1.42			$	2.49			$	1.48			$	2.48
Weighted average common shares outstanding — basic			39,930				39,807				40,048				39,595
Per common share data — Diluted
Loss from continuing operations (net of preferred dividends and redemption costs)		$	(0.07	)		$	(0.14	)		$	(0.08	)		$	(0.34	)
Income from discontinued operations			1.48				2.63				1.56				2.82
Net income available to common shareholders		$	1.42			$	2.49			$	1.48			$	2.48
Weighted average common shares outstanding — diluted			39,930				39,807				40,048				39,595
Dividends declared		$	0.45			$	0.45			$	0.90			$	0.90

The accompanying notes are an integral part of these consolidated financial statements.

POST PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND
ACCUMULATED EARNINGS
(In thousands, except per share data)
(Unaudited)

																		Accumulated
										Additional								Other
		Preferred				Common				Paid-in				Accumulated				Comprehensive				Deferred				Treasury
		Stock				Stock				Capital				Earnings				Income (Loss)				Compensation				Stock				Total
Shareholders’ Equity and Accumulated Earnings, December 31, 2004		$	29			$	401			$	775,221			$	25,075			$	(8,668	)		$	(3,988	)		$	—			$	788,070
Comprehensive income
Net income			—				—				—				63,121				—				—				—				63,121
Net change in derivative value, net of minority interest			—				—				—				—				1,828				—				—				1,828
Total comprehensive income																															64,949
Proceeds from employee stock purchase and stock option plans			—				2				2,962				—				—				—				7,653				10,617
Adjustment for minority interest of unitholders in Operating Partnership upon conversion of units into common shares and at dates of capital transactions			—				—				285				—				—				—				2,945				3,230
Stock-based compensation			—				—				341				—				—				—				—				341
Restricted stock issuances, net of forfeitures			—				—				1,098				—				—				(702	)			(396	)			—
Amortization of deferred compensation			—				—				—				—				—				635				—				635
Treasury stock acquisitions			—				—				—				—				—				—				(21,283	)			(21,283	)
Dividends to preferred shareholders			—				—				—				(3,819	)			—				—				—				(3,819	)
Dividends to common shareholders			—				—				—				(36,047	)			—				—				—				(36,047	)
Shareholders’ Equity and Accumulated Earnings, June 30, 2005		$	29			$	403			$	779,907			$	48,330			$	(6,840	)		$	(4,055	)		$	(11,081	)		$	806,693

The accompanying notes are an integral part of these consolidated financial statements.

POST PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share data)
(Unaudited)

		Six months ended
		June 30,
		2005				2004
Cash Flows From Operating Activities
Net income		$	63,121			$	104,519
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			38,946				42,365
Amortization of deferred financing costs			2,717				2,208
Minority interest of preferred unitholders in Operating Partnership			—				2,800
Minority interest of common unitholders in Operating Partnership			(200	)			(964	)
Minority interest in discontinued operations			3,784				8,102
Gains on sales of real estate assets — discontinued operations			(62,839	)			(113,739	)
Gain on sale of technology investment			(5,267	)			—
Asset impairment charge			—				626
Equity in income of unconsolidated entities, net of distributions			339				238
Stock-based compensation			1,022				865
Loss on early extinguishment of debt			1,374				4,128
Changes in assets, (increase) decrease in:
Restricted cash			(2,477	)			(20	)
Other assets			(436	)			(1,835	)
Deferred charges			(327	)			1,361
Changes in liabilities, increase (decrease) in:
Accrued interest payable			(1,669	)			(34	)
Accounts payable and accrued expenses			9,891				8,446
Security deposits and prepaid rents			2,669				(566	)
Net cash provided by operating activities			50,648				58,500
Cash Flows From Investing Activities
Construction and acquisition of real estate assets, net of payables			(86,911	)			(37,663	)
Net proceeds from sales of real estate assets			93,398				138,637
Proceeds from sale of technology investment			5,267				—
Recurring capital expenditures			(4,822	)			(5,193	)
Non-recurring capital expenditures			(2,029	)			(2,546	)
Revenue generating capital expenditures			—				(26	)
Corporate additions and improvements			(978	)			(287	)
Distributions from (investments in and advances to) unconsolidated entities			(13,541	)			52,287
Net cash provided by (used in) investing activities			(9,616	)			145,209
Cash Flows From Financing Activities
Payments on indebtedness			(189,267	)			(14,354	)
Proceeds from indebtedness			100,000				35,000
Payments of financing costs			(976	)			(4,262	)
Lines of credit proceeds (repayments), net			105,785				(72,010	)
Treasury stock acquisitions			(21,283	)			—
Redemption of preferred stock			—				(50,000	)
Proceeds from employee stock purchase and stock option plans			10,617				2,845
Capital contributions (distributions) of minority interests			283				(1,506	)
Distributions to preferred unitholders			—				(2,800	)
Distributions to common unitholders			(2,216	)			(2,942	)
Dividends paid to preferred shareholders			(3,819	)			(4,507	)
Dividends paid to common shareholders			(36,110	)			(35,216	)
Net cash used in financing activities			(36,986	)			(149,752	)
Net increase in cash and cash equivalents			4,046				53,957
Cash and cash equivalents, beginning of period			123				1,334
Cash and cash equivalents, end of period		$	4,169			$	55,291

The accompanying notes are an integral part of these consolidated financial statements.

POST PROPERTIES, INC.

(Unaudited, in thousands, except per share and apartment unit data)

1.		ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
		Organization
		Post Properties, Inc. and its subsidiaries develop, own and manage upscale multifamily apartment communities in selected markets in the United States. As used herein, the term “Company” includes Post Properties, Inc. and its subsidiaries, including Post Apartment Homes, L.P. (the “Operating Partnership”), unless the context indicates otherwise. The Company, through its wholly-owned subsidiaries, is the general partner and owns a majority interest in the Operating Partnership which, through its subsidiaries, conducts substantially all of the on-going operations of the Company. At June 30, 2005, the Company owned 23,533 apartment units in 59 apartment communities, including 545 apartment units in two apartment communities held in unconsolidated entities and including 205 apartment units currently under development in one community. The Company is also developing 145 for-sale condominium units and is converting 382 apartment units in three communities (including one in an unconsolidated entity) into for-sale condominium units through a taxable REIT subsidiary. At June 30, 2005, approximately 50.1%, 16.9%, 9.0% and 8.5% (on a unit basis) of the Company’s operating communities were located in Atlanta, Dallas, Tampa and the greater Washington, D.C. metropolitan areas, respectively.
		The Company has elected to qualify and operate as a self-administrated and self-managed real estate investment trust (“REIT”) for federal income tax purposes. A REIT is a legal entity which holds real estate interests and through payments of dividends to shareholders, in practical effect, is not subject to federal income taxes at the corporate level, except to the extent that taxable income is earned through its taxable REIT subsidiaries (see note 11).
		As of June 30, 2005, the Company had outstanding 40,035 shares of common stock and owned the same number of units of common limited partnership interests (“Common Units”) in the Operating Partnership, representing a 94.5% ownership interest in the Operating Partnership. Common Units held by persons other than the Company totaled 2,333 as of June 30, 2005 and represented a 5.5% common minority interest in the Operating Partnership. 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 redemption, at the option of the Company. The Company’s weighted average common ownership interest in the Operating Partnership was 94.3% and 93.7% for the three months and 94.3% and 93.2% for the six months ended June 30, 2005 and 2004, respectively.
		Basis of Presentation
		The accompanying unaudited financial statements have been prepared by the Company’s management in accordance with generally accepted accounting principles for interim financial information and applicable rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normally recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2004. Certain 2004 amounts have been reclassified to conform to the current year’s financial statement presentation.
		Revenue Recognition
		Sales and the associated gains or losses of real estate assets and for-sale condominiums are recognized in accordance with the provisions of SFAS No. 66, “Accounting for Sales of Real Estate.” For condominium conversion projects, sales and the associated gains for individual condominium units are recognized upon the closing of the sale transactions, as all conditions for full profit recognition have been met. In accordance with SFAS No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets,” gains on sales of condominium units at condominium conversion projects are included in discontinued operations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share and apartment unit data)

Stock-based Compensation

Effective January 1, 2003, the Company accounts for stock-based compensation under the fair value method prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation.” In adopting SFAS No. 123, the Company used the prospective method prescribed in SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.”

The following table reflects the effect on the Company’s net income and earnings per common share had the fair value method of accounting under SFAS No. 123 been applied to all stock awards for each period.

		Three months ended								Six months ended
		June 30,								June 30,
		2005				2004				2005				2004
Net income available to common shareholders
As reported		$	56,534			$	99,201			$	59,302			$	98,296
Stock-based compensation included in net income as reported, net of minority interest			525				420				963				805
Stock-based compensation determined under the fair value method for all awards, net of minority interest			(532	)			(434	)			(968	)			(839	)
Pro forma		$	56,527			$	99,187			$	59,297			$	98,262
Net income per common share — basic
As reported		$	1.42			$	2.49			$	1.48			$	2.48
Pro forma		$	1.42			$	2.49			$	1.48			$	2.48
Net income per common share — diluted
As reported		$	1.42			$	2.49			$	1.48			$	2.48
Pro forma		$	1.42			$	2.49			$	1.48			$	2.48

SFAS No. 123R, “Share-Based Payment,” was issued in December 2004. SFAS No. 123R revises SFAS No. 123, “Accounting for Stock-Based Compensation” and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. SFAS No. 123R also supersedes the provisions of APB No. 25. The provisions of SFAS No. 123R will be effective for the Company as of January 1, 2006. The Company plans to adopt the provisions of SFAS No. 123R in the first quarter of 2006 and is currently evaluating the alternative methods of adoption. Since the Company elected to apply the provisions of SFAS No. 123 on January 1, 2003, the adoption of SFAS No. 123R is not expected to have a significant impact on the Company’s financial position or results of operations.

Long-term Ground Leases

The Company is party to six long-term ground leases associated with land underlying certain of the Company’s operating communities. The ground leases generally provide for future increases in minimum lease payments tied to an inflation index or contain stated rent increases that generally compensate for the impact of inflation. Beginning in 2005, the Company recognizes ground lease expense on the straight-line method over the life of the ground lease for all ground leases with stated rent increases. The recognition of ground lease expense as incurred has historically not been materially different than recognizing ground lease expense on a straight-line basis.

(Unaudited, in thousands, except per share and apartment unit data)

2.		INDEBTEDNESS
		At June 30, 2005 and December 31, 2004, the Company’s indebtedness consisted of the following:

		Payment						Maturity		June 30,				December 31,
Description		Terms		Interest Rate				Date		2005				2004
Unsecured Notes
Senior Notes		Int.			5.125% - 7.70	%		2006-2012		$	485,000			$	385,000
Medium Term Notes		Int.			6.78	%		2005			25,000				212,043
											510,000				597,043
Unsecured Lines of Credit & Other
Syndicated Line of Credit		N/A		LIBOR + 0.75%(1)				2007			147,000				40,000
Cash Management Line		N/A		LIBOR + 0.75%				2007			9,533				10,748
											156,533				50,748
Conventional Fixed Rate (Secured)
FNMA		Prin. and Int.			6.975	%(2)		2029			98,500				98,500
Other		Prin. and Int.			4.27% - 7.69	%		2007-2013			270,908				273,132
											369,408				371,632
Tax-Exempt Floating Rate Bonds (Secured)		Int.			2.29	%(3)		2025			75,995				110,055
Total										$	1,111,936			$	1,129,478

Debt maturities

The aggregate maturities of the Company’s indebtedness are as follows:

Remainder of 2005		$	28,652
2006			81,269
2007			314,726	(1)
2008			4,557
2009			75,901
Thereafter			606,831
		$	1,111,936

Debt issuances and retirements

Upon their maturity in February 2005, the Company repaid $25,000 of its 7.28% medium term, unsecured notes, from available borrowings under its unsecured lines of credit. In March 2005, the Company repaid the $100,000 outstanding principal balance under its 6.85% Mandatory Par Put Remarketed Securities (“MOPPRS”) debt arrangement from available borrowings under its unsecured lines of credit.

In May 2005, the Company issued $100,000 of senior unsecured notes. The notes bear interest at 5.45% and mature in June 2012. The net proceeds from the unsecured notes were used to reduce amounts outstanding under the Company’s unsecured lines of credit. Upon their maturity in June 2005, the Company repaid $62,043 of its 8.125% medium term, unsecured notes, from available borrowings under its unsecured lines of credit.

In May 2005, the Company sold two apartment communities subject to the assumption of $34,060 of tax-exempt mortgage indebtedness (see note 4). As a result of this debt assumption, the Company recorded a loss on early extinguishment of debt of $1,374 ($1,296 net of minority interest) related to the write-off of deferred loan costs of $966 ($911 net of minority interest) relating to such assumed indebtedness and the realization of a $408 ($385 net of minority interest) loss in connection with the termination of related interest rate cap agreements that were used as cash flow hedges of the assumed debt.

(Unaudited, in thousands, except per share and apartment unit data)

Unsecured Lines of Credit

The Company utilizes a $350,000 syndicated unsecured revolving line of credit (the “Revolver”) that matures in January 2007 for its short-term financing needs. The Revolver has a current stated interest rate of LIBOR plus 0.75% or the prime rate and was provided by a syndicate of nine banks led by Wachovia Bank, N.A. Additionally, the Revolver requires the payment of annual facility fees currently equal to 0.15% of the aggregate loan commitment. The Revolver provides for the interest rate and facility fee rate to be adjusted up or down based on changes in the credit ratings on the Company’s senior unsecured debt. The rates under the Revolver are based on the higher of the Company’s unsecured debt ratings in instances where the Company has split unsecured debt ratings. The Revolver also includes a money market competitive bid option for short-term funds up to $175,000 at rates generally below the stated line rate. The credit agreement for the Revolver contains customary representations, covenants and events of default, including fixed charge coverage and maximum leverage ratios as well as 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 $15,000 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 these ratios and covenants will adversely affect the ability of the Operating Partnership to borrow money or make distributions, or the Company to declare dividends, at the Company’s current dividend level. At June 30, 2005, the Company had issued letters of credit to third parties totaling $2,778 under this facility.

Additionally, the Company has a $20,000 unsecured line of credit with Wachovia Bank, N.A. (the “Cash Management Line”). The Cash Management line matures in January 2007 and carries pricing and terms, including debt covenants, substantially consistent with those of the Revolver.

3.		INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ENTITIES
		At June 30, 2005, the Company held investments in three individual limited liability companies (the “Property LLCs”) with an institutional investor. Each Property LLC owns a single apartment community. In March 2005, one of the Property LLCs elected to convert its apartment community into for-sale condominiums. The Company holds a 35% equity interest in 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 $6,404 at June 30, 2005. This excess investment related to the two Property LLCs holding apartment communities is being amortized as a reduction to earnings on a straight-line basis over the lives of the related assets. The excess investment of $844 at June 30, 2005 related to the Property LLC holding the condominium conversion community will be recognized as additional cost of sales as the underlying condominiums are sold. The Company provides real estate services (development, construction and property management) to the Property LLCs for which it earns fees.
		The operating results of the Company include its share of net income from the investments in the Property LLCs. A summary of financial information for the Property LLCs in the aggregate is as follows:

		June 30,				December 31,
Balance Sheet Data		2005				2004
Real estate assets, net of accumulated depreciation of $7,067 and $9,712, respectively		$	97,225			$	124,072
Assets held for sale, net (1)			23,889				—
Cash and other			2,182				2,797
Total assets		$	123,296			$	126,869
Mortgage notes payable		$	66,999			$	83,468
Mortgage notes payable to Company			13,661				—
Other liabilities			1,606				1,296
Total liabilities			82,266				84,764
Members’ equity			41,030				42,105
Total liabilities and members’ equity		$	123,296			$	126,869
Company’s equity investment		$	20,780			$	21,320

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share and apartment unit data)

		Three months ended								Six months ended
		June 30,								June 30,
Income Statement Data		2005				2004				2005				2004
Revenue
Rental		$	2,721			$	2,614			$	5,361			$	5,178
Other property revenues			230				211				415				387
Total revenues			2,951				2,825				5,776				5,565
Expenses
Property operating and maintenance			889				933				1,799				1,836
Depreciation and amortization			655				648				1,308				1,278
Interest			688				688				1,376				1,282
Total expenses			2,232				2,269				4,483				4,396
Income from continuing operations			719				556				1,293				1,169
Discontinued Operations
Income (loss) from discontinued operations			16				(67	)			(96	)			(164	)
Gains on sales of real estate assets			860				—				855				—
Loss on early extinguishment of debt			—				—				(273	)			—
Income from discontinued operations			876				(67	)			486				(164	)
Net income		$	1,595			$	489			$	1,779			$	1,005
Company’s share of net income		$	553			$	207			$	701			$	422

For the three and six months ended June 30, 2005, gains on sales of real estate assets represent net gains of $860 and $855, respectively, from condominium sales at the condominium conversion community held by one of the Property LLCs. A summary of revenues and costs and expenses of condominium activities for the three and six months ended June 30, 2005 was as follows:

		Three months				Six months
		ended				ended
		June 30, 2005				June 30, 2005
Condominium revenues, net		$	4,183			$	4,183
Condominium costs and expenses			(3,323	)			(3,328	)
Gains on condominium sales		$	860			$	855

		At June 30, 2005, mortgage notes payable include a $50,000 mortgage note that bears interest at 4.13%, requires monthly interest payments and annual principal payment of $1 through 2009. Thereafter, the note requires monthly principal and interest payments based on a 25-year amortization schedule and matures in April 2034. The note is callable by the lender in May 2009 and on each successive fifth year anniversary of the note thereafter. The note is prepayable without penalty in May 2008. The additional mortgage note payable totaling $17,000 bears interest at a rate of 4.04% and matures in 2008.
		In March 2005, one of the Property LLCs elected to convert its apartment community into for-sale condominiums. As a result of its decision to sell the community through the condominium conversion process, the Property LLC prepaid its third party mortgage note payable of $16,392 through secured borrowings from the Company. The Property LLC incurred debt prepayment costs and expenses associated with the write-off of unamortized deferred financing costs totaling $273 in March 2005. The mortgage note payable to the Company has a fixed rate component ($16,392) bearing interest at 4.28% and a variable rate component bearing interest at LIBOR plus 1.90%. This note is repayable from the proceeds of condominium sales and matures in February 2008.
4.		REAL ESTATE ACQUISITION AND DISPOSITION ACTIVITY
		Acquisition Activity
		In June 2005, the Company acquired a 319-unit apartment community located in suburban Charlotte, NC for approximately $38,240, including closing costs and the reimbursement of a fee to terminate a loan commitment paid for by the seller. Additionally, the Company plans to spend up to approximately $1,100 to improve the community. The purchase price of this community was preliminarily allocated to the assets acquired based on their estimated fair values.
		Disposition Activity
		The Company classifies real estate assets as held for sale after the approval of its investment committee and after the Company has commenced an active program to sell the assets. At June 30, 2005, the Company had one apartment community, containing 1,738 units, and certain tracts of land classified as held for sale. In addition, the Company had two communities, originally containing 261 units, held for sale at June 30, 2005 that are being converted into condominiums and sold. These real estate assets

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share and apartment unit data)

are reflected in the accompanying consolidated balance sheet at $72,073, which represents the lower of their depreciated cost or fair value less costs to sell. The Company sold the one apartment community held for sale containing 1,738 units in the third quarter of 2005 for a total gross purchase price of approximately $132,500, including the assumption by the purchaser of approximately $47,500 of tax-exempt secured indebtedness.

Under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the operating results of real estate assets designated as held for sale are included in discontinued operations in the consolidated statement of operations for all periods presented. Additionally, gains or losses on the sale of these assets are included in discontinued operations. For the three and six months ended June 30, 2005, income from discontinued operations included the results of operations of one community, containing 1,738 units, classified as held for sale at June 30, 2005 and results of operations of five apartment communities sold in 2005 through their sale dates. Additionally, discontinued operations included the operating results and gains on sales of real estate of two communities, originally containing 261 units, held for sale at June 30, 2005 that are being converted into condominiums and sold. For the three and six months ended June 30, 2004, income from discontinued operations included the results of operations of the communities classified as held for sale at June 30, 2005, five apartment communities sold in 2005 and eight apartment communities sold in 2004 through the earlier of June 30, 2004 or their sale dates.

The revenues and expenses of these communities for the three and six months ended June 30, 2005 and 2004 were as follows:

		Three months ended								Six months ended
		June 30,								June 30,
		2005				2004				2005				2004
Revenues
Rental		$	4,855			$	13,199			$	11,839			$	27,504
Other property revenues			426				1,186				1,057				2,402
Total revenues			5,281				14,335				12,896				29,906
Expenses
Property operating and maintenance (exclusive of items shown separately below)			2,828				6,365				6,088				12,972
Depreciation			—				1,488				—				3,053
Interest			832				1,553				1,876				3,337
Minority interest in consolidated property partnerships			—				(55	)			14				(144	)
Asset impairment charge			—				626				–				626
Total expenses			3,660				9,977				7,978				19,844
Income from discontinued operations before minority interest			1,621				4,408				4,918				10,062
Minority interest			(92	)			(271	)			(281	)			(681	)
Income from discontinued operations		$	1,529			$	4,137			$	4,637			$	9,381

For the three and six months ended June 30, 2005, the Company recognized net gains in discontinued operations of $49,710 ($46,877 net of minority interest) from the sale of five communities, containing 1,309 units. The sales generated net proceeds of approximately $97,900, including $34,060 of tax-exempt secured debt assumed by the purchasers.

In addition, for the three and six months ended June 30, 2005, gains on sales of real estate assets included the net gains of $13,153 ($12,042 net of minority interest and provision for income taxes) and $13,512 ($12,381 net of minority interest and provision for income taxes), respectively, from condominium sales at the Company’s condominium conversion communities. A summary of revenues and costs and expenses of condominium activities for the three and six months ended June 30, 2005 was as follows:

		Three months				Six months
		ended				ended
		June 30, 2005				June 30, 2005
Condominium revenues, net		$	32,074			$	35,370
Condominium costs and expenses			(18,921	)			(21,858	)
Gains on condominium sales, before minority interest and provision for income taxes			13,153				13,512
Minority interest			(728	)			(748	)
Provision for income taxes			(383	)			(383	)
Gains on condominium sales, net of minority interest and provision for income taxes		$	12,042			$	12,381

For the three months ended June 30, 2004, the Company recognized net gains from discontinued operations of $112,112 ($104,530 net of minority interest) from the sale of seven communities containing 3,482 units. These sales generated net proceeds of approximately $218,982, including $104,325 of tax-exempt secured indebtedness assumed by the purchasers. For the

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share and apartment unit data)

		six months ended June 30, 2004, the Company recognized net gains from discontinued operations of $113,739 ($106,039 net of minority interest) from the sale of eight communities containing 3,880 units and certain land parcels. Theses sales generated net proceeds of approximately $242,962, including debt assumed by the purchasers of $104,325.
5.		SHAREHOLDERS’ EQUITY
		Common Stock Purchases
		In the three and six months ended June 30, 2005, the Company repurchased approximately 375 and 661 shares, respectively, of its common stock at an aggregate cost of $12,237 and $21,283, respectively, under 10b5-1 stock repurchase plans, the latest of which will expire on August 31, 2005. These shares were purchased under a board of directors approved plan which provides for aggregate common or preferred stock repurchases of up to $200,000 through December 31, 2006.
		Computation of Earnings Per Common Share
		For the three and six months ended June 30, 2005 and 2004, a reconciliation of the numerator and denominator used in the computation of basic and diluted income from continuing operations per common share is as follows:

		Three months ended								Six months ended
		June 30,								June 30,
		2005				2004				2005				2004
Income (loss) from continuing operations available to common shareholders (numerator):
Income (loss) from continuing operations		$	(709	)		$	(3,708	)		$	522			$	(7,052	)
Less: Preferred stock dividends			(1,909	)			(1,909	)			(3,819	)			(4,507	)
Less: Preferred stock redemption costs			—				—				—				(1,716	)
Loss from continuing operations available to common shareholders		$	(2,618	)		$	(5,617	)		$	(3,297	)		$	(13,275	)
Common shares (denominator):
Weighted average shares outstanding — basic			39,930				39,807				40,048				39,595
Incremental shares from assumed conversion of stock options (1)			—				—				—				—
Weighted average shares outstanding — diluted (1)			39,930				39,807				40,048				39,595

		At June 30, 2005 and 2004, stock options to purchase 4,309 and 4,800 shares of common stock, respectively, were excluded from the computation of diluted earnings per common share as these stock options were antidilutive.
6.		DERIVATIVE FINANCIAL INSTRUMENTS
		At June 30, 2005, the Company had an outstanding interest rate swap agreement with a notional value of approximately $98,500 with a maturity date in 2009. The interest rate swap agreement is included on the accompanying consolidated balance sheet at fair value. The Company records the changes in the fair value of this cash flow hedge as a change in accumulated other comprehensive income (loss), a shareholders’ equity account, in the accompanying consolidated balance sheet.
		At June 30, 2005, the Company had an outstanding interest rate cap agreement with a financial institution with a notional value of $75,995. The interest rate cap agreement is a cash flow hedge that provides a fixed interest ceiling at 5% for the Company’s variable rate, tax-exempt borrowings aggregating $75,995 at June 30, 2005. The Company is required to maintain the interest rate exposure protection under the terms of the financing arrangements. The interest rate cap arrangement is included on the accompanying balance sheet at fair value. At June 30, 2005, the difference between the amortized costs of the interest rate cap arrangements and their fair value of $27 is included in accumulated other comprehensive income (loss), a shareholders’ equity account. The original cost of $967 of the arrangements is being amortized as additional expense over their five-year term.
		In May 2005, in connection with the sale of two communities discussed in note 4 above, the Company sold its interest in interest rate cap agreements with a notional value of $34,060 for aggregate proceeds of $10 and realized a loss of $408 ($385 net of minority interest) that was included in the loss on early extinguishment of indebtedness on the accompanying statement of

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share and apartment unit data)

operations. The unrealized loss on these interest rate cap agreements was previously reflected in accumulated other comprehensive income, a shareholders’ equity account. These interest rate cap agreements were sold as the underlying hedged indebtedness was assumed by the purchaser in connection with the sale of the related assets.

A summary of comprehensive income for the three and six months ended June 30, 2005 and 2004 is as follows:

		Three months ended								Six months ended
		June 30,								June 30,
		2005				2004				2005				2004
Net income		$	58,443			$	101,110			$	63,121			$	104,519
Change in derivative values, net of minority interest			(838	)			5,770				1,828				3,683
Comprehensive income		$	57,605			$	106,880			$	64,949			$	108,202

7.		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 apartment community rental operations. Apartment community rental operations are broken down into four segments based on the various stages in the apartment community ownership lifecycle. These segments are described below. All commercial properties and other ancillary service and support operations are aggregated in the line item “other” in the accompanying segment information. The segment information presented below reflects the segment categories based on the lifecycle status of each community as of January 1, 2004. The segment information for the three and six months ended June 30, 2004 has been adjusted due to the restatement impact of reclassifying the operating results of the assets designated as held for sale in 2004 and 2005 to discontinued operations under SFAS No. 144 (see note 4).

	•		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 2004 — 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. The Company has no communities in the development or lease-up stage for the periods presented.
	•		Acquired communities — those communities acquired in the current or prior year.

Segment Performance Measure

Management uses contribution to consolidated property net operating income (“NOI”) as the performance measure for its operating segments. The Company uses net operating income, including net operating income of stabilized communities, as an operating measure. Net operating income is defined as rental and other property revenue from real estate operations less total property and maintenance expenses from real estate operations (excluding depreciation and amortization). The Company believes that net operating income is an important supplemental measure of operating performance for a REIT’s operating real estate because it provides a measure of the core operations, rather than factoring in depreciation and amortization, financing costs and general and administrative expenses generally incurred at the corporate level. This measure is particularly useful, in the opinion of the Company, in evaluating the performance of geographic operations, operating segment groupings and individual properties. Additionally, the Company believes that net operating income, as defined, is a widely accepted measure of comparative operating performance in the real estate investment community. The Company believes that the line on the Company’s consolidated statement of operations entitled “net income” is the most directly comparable GAAP measure to net operating income.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share and apartment unit data)

Segment Information

The following table reflects each segment’s contribution to consolidated revenues and property NOI together with a reconciliation of segment contribution to property NOI to net income. 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.

		Three months ended								Six months ended
		June 30,								June 30,
		2005				2004				2005				2004
Revenues
Fully stabilized communities		$	63,515			$	62,319			$	125,928			$	124,182
Communities stabilized during 2004			1,761				1,872				3,521				3,588
Acquired communities			2,415				206				4,499				206
Other property segments			5,369				5,416				10,621				10,449
Other			61				47				132				122
Consolidated revenues		$	73,121			$	69,860			$	144,701			$	138,547
Contribution to NOI
Fully stabilized communities		$	38,788			$	38,101			$	76,358			$	76,004
Communities stabilized during 2004			1,197				1,367				2,408				2,608
Acquired communities			1,696				149				3,031				149
Other			(1,594	)			(425	)			(2,994	)			(1,429	)
Consolidated property net operating income			40,087				39,192				78,803				77,332
Interest income			189				213				354				393
Other revenue			61				47				132				122
Minority interest in consolidated property partnerships			64				248				178				432
Depreciation			(19,414	)			(19,689	)			(38,946	)			(39,312	)
Interest expense			(15,206	)			(15,942	)			(30,885	)			(31,362	)
Amortization of deferred financing costs			(1,029	)			(1,092	)			(2,717	)			(2,208	)
General and administrative			(5,433	)			(5,476	)			(10,728	)			(10,119	)
Development costs and other			(740	)			(381	)			(1,837	)			(916	)
Equity in income of unconsolidated real estate entities			553				207				701				422
Gain on sale of technology investment			—				—				5,267				—
Minority interest of preferred unitholders			—				(1,400	)			—				(2,800	)
Minority interest of common unitholders			159				365				200				964
Income (loss) from continuing operations			(709	)			(3,708	)			522				(7,052	)
Income from discontinued operations			59,152				104,818				62,599				111,571
Net income		$	58,443			$	101,110			$	63,121			$	104,519

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except per share and apartment unit data)

8.		SEVERANCE COSTS
		In prior years, the Company recorded severance charges associated with the departure of certain executive officers of the Company. Under certain of these arrangements, the Company is required to make certain payments and provide specified benefits through 2013 and 2016, respectively. The following table summarizes the activity relating to aggregate severance charges for the six months ended June 30, 2005 and 2004:

		Six months ended
		June 30,
		2005				2004
Accrued severance charges, beginning of period		$	15,317			$	19,717
Payments for period			(1,494	)			(1,665	)
Interest accretion			453				502
Accrued severance charges, end of period		$	14,276			$	18,008