Post Properties 8K Other Events | SEC 12 Dec 06

Exhibit 99.1

ITEM 6. SELECTED FINANCIAL DATA

Post Properties, Inc.
(In thousands, except per share and apartment unit data)


	Year ended December 31,
	2005			2004			2003			2002			2001
STATEMENT OF OPERATIONS DATA
Revenues
Rental	$	264,763		$	251,661		$	238,323		$	234,593		$	252,117
Other		15,733			15,131			13,534			13,112			13,839
Third-party services (1)		—			—			—			—			14,088

Total revenues	$	280,496		$	266,792		$	251,857		$	247,705		$	280,044

Income (loss) from continuing operations (2)	$	5,356		$	(26,715	)	$	(28,280	)	$	21,732		$	54,415
Income from discontinued operations (3)		136,592			114,934			42,436			39,014			33,125

Income before cumulative effect of accounting change	$	141,948		$	88,219		$	14,156		$	60,746		$	87,540

Net income (4)	$	141,948		$	88,219		$	14,156		$	60,746		$	86,927
Dividends to preferred shareholders		(7,637	)		(8,325	)		(11,449	)		(11,449	)		(11,768	)
Redemption costs on preferred stock and units		—			(3,526	)		—			—			(239	)

Net income available to common shareholders	$	134,311		$	76,368		$	2,707		$	49,297		$	74,920


PER COMMON SHARE DATA
Income (loss) from continuing operations (net of preferred dividends and redemption costs) — basic	$	(0.06	)	$	(0.97	)	$	(1.05	)	$	0.28		$	1.11
Income from discontinued operations — basic		3.40			2.89			1.13			1.06			0.87
Income before cumulative effect of accounting change (net of preferred dividends and redemption costs) — basic		3.34			1.92			0.07			1.33			1.98

Net income available to common shareholders — basic		3.34			1.92			0.07			1.33			1.97
Income (loss) from continuing operations (net of preferred dividends and redemption costs) — diluted	$	(0.06	)	$	(0.97	)	$	(1.05	)	$	0.28		$	1.11
Income from discontinued operations — diluted		3.40			2.89			1.13			1.06			0.87
Income before cumulative effect of accounting change (net of preferred dividends and redemption costs) — diluted		3.34			1.92			0.07			1.33			1.97
Net income available to common shareholders — diluted		3.34			1.92			0.07			1.33			1.96
Dividends declared		1.80			1.80			1.80			3.12			3.12
Weighted average common shares outstanding — basic		40,217			39,777			37,688			36,939			38,053
Weighted average common shares outstanding — diluted		40,217			39,777			37,688			36,954			38,268

BALANCE SHEET DATA
Real estate, before accumulated depreciation	$	2,416,335		$	2,502,418		$	2,596,376		$	2,705,215		$	2,777,980
Real estate, net of accumulated depreciation		1,899,381			1,977,719			2,085,517			2,258,037			2,371,256
Total assets		1,981,454			2,053,842			2,215,451			2,508,151			2,538,351
Total debt		980,615			1,129,478			1,186,322			1,414,555			1,336,520
Shareholders’ equity		881,009			788,070			796,526			833,699			901,517

OTHER DATA
Cash flow provided by (used in):
Operating activities	$	86,761		$	79,105		$	91,549		$	119,763		$	161,564
Investing activities		70,293			131,873			234,195			(48,821	)		(51,213	)
Financing activities		(150,767	)		(212,189	)		(330,800	)		(69,355	)		(113,007	)

Total stabilized communities (at end of period)		57			65			70			75			78
Total stabilized apartment units (at end of period)		21,237			24,700			27,613			29,199			27,710
Average economic occupancy (fully stabilized communities) (5)		94.6	%		93.5	%		91.9	%		90.9	%		94.9	%


(1)		Consists of revenues from property management and landscape services provided to properties owned by third parties. These businesses were sold in the fourth quarter of 2001.

(2)		Income (loss) from continuing operations in 2005 includes a $5,267 gain on sale of technology investment and severance charges of $796. Income (loss) from continuing operations in 2004 included the impact of costs associated with the termination of a debt remarketing agreement (interest expense) and an early debt extinguishment loss totaling $14,626. See note 3 to the consolidated financial statements for a discussion of these costs. Income (loss) from continuing operations in 2003 included the impact of severance and proxy costs totaling $26,737. See note 7 to the consolidated financial statements for a discussion of these costs. Income from continuing operations in 2001 included the impact of project abandonment, employee severance and other charges totaling $17,450.

(3)		Upon the implementation of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” on January 1, 2002, the operating results of real estate held for sale and sold are reported as discontinued operations for all years presented. Additionally, all gains and losses on the sale of assets classified as held for sale subsequent to January 1, 2002 are included in discontinued operations. As the operating results and gains or losses from the sale of real estate assets prior to January 1, 2002 are included in continuing operations, the presentation of results is not comparable between years.

(4)		Includes the impact of $613, net of minority interest, resulting from the cumulative effect of accounting change from the Company’s adoption of SFAS No. 133 in 2001.

(5)		Calculated based on fully stabilized communities as defined for each year (unadjusted for the impact of assets designated as held for sale in subsequent years). 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 net concessions and employee discounts (average economic occupancy, taking account of these amounts, would have been 94.0%, 93.0%, 90.8%, 89.1 % and 93.8% for the years ended December 31, 2005, 2004, 2003, 2002 and 2001, respectively). Net concessions were $947, $621, $2,518, $4,215 and $1,860 for the years ended December 31, 2005, 2004, 2003, 2002 and 2001, respectively. Employee discounts were $398, $442, $535, $660 and $895 for the years ended December 31, 2005, 2004, 2003, 2002 and 2001, 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.
Post Apartment Homes, L.P.

Post Apartment Homes, L.P.
(In thousands, except per unit and apartment unit data)


	Year ended December 31,
	2005			2004			2003			2002			2001
STATEMENT OF OPERATIONS DATA
Revenues
Rental	$	264,763		$	251,661		$	238,323		$	234,593		$	252,117
Other		15,733			15,131			13,534			13,112			13,839
Third-party services (1)		—			—			—			—			14,088

Total revenues	$	280,496		$	266,792		$	251,857		$	247,705		$	280,044

Income (loss) from continuing operations (2)	$	5,236		$	(25,550	)	$	(27,212	)	$	28,738		$	65,716
Income from discontinued operations (3)		143,811			122,727			47,309			44,380			37,616

Income before cumulative effect of accounting change	$	149,047		$	97,177		$	20,097		$	73,118		$	103,332

Net income (4)	$	149,047		$	97,177		$	20,097		$	73,118		$	102,637
Distributions to preferred unitholders		(7,637	)		(12,105	)		(17,049	)		(17,049	)		(17,368	)
Redemption costs on preferred units		—			(3,526	)		—			—			(239	)

Net income available to common unitholders	$	141,410		$	81,546		$	3,048		$	56,069		$	85,030


PER COMMON UNIT DATA
Income (loss) from continuing operations (net of preferred distributions and redemption costs) — basic	$	(0.06	)	$	(0.97	)	$	(1.05	)	$	0.28		$	1.11
Income from discontinued operations — basic		3.40			2.89			1.12			1.06			0.87
Income before cumulative effect of accounting change (net of preferred distributions and redemption costs) — basic		3.34			1.92			0.07			1.33			1.98

Net income available to common unitholders – basic		3.34			1.92			0.07			1.33			1.97
Income (loss) from continuing operations (net of preferred distributions and redemption costs) — diluted	$	(0.06	)	$	(0.97	)	$	(1.05	)	$	0.28		$	1.11
Income from discontinued operations — diluted		3.40			2.89			1.12			1.06			0.87
Income before cumulative effect of accounting change (net of preferred distributions and redemption costs) — diluted		3.34			1.92			0.07			1.33			1.97
Net income available to common unitholders — diluted		3.34			1.92			0.07			1.33			1.96
Distributions declared		1.80			1.80			1.80			3.12			3.12

Weighted average common units outstanding — basic		42,353			42,474			42,134			42,021			43,212
Weighted average common units outstanding — diluted		42,353			42,474			42,134			42,036			43,427

BALANCE SHEET DATA
Real estate, before accumulated depreciation	$	2,416,335		$	2,502,418		$	2,596,376		$	2,705,215		$	2,777,980
Real estate, net of accumulated depreciation		1,899,381			1,977,719			2,085,517			2,258,037			2,371,256
Total assets		1,981,454			2,053,842			2,215,451			2,508,151			2,538,351
Total debt		980,615			1,129,478			1,186,322			1,414,555			1,336,520
Partners’ equity		907,773			831,411			928,935			993,976			1,077,670

OTHER DATA
Cash flow provided by (used in):
Operating activities	$	86,761		$	79,105		$	91,549		$	119,763		$	161,564
Investing activities		70,293			131,873			234,195			(48,821	)		(51,213	)
Financing activities		(150,767	)		(212,189	)		(330,800	)		(69,355	)		(113,007	)

Total stabilized communities (at end of period)		57			65			70			75			78
Total stabilized apartment units (at end of period)		21,237			24,700			27,613			29,199			27,710
Average economic occupancy (fully stabilized communities) (5)		94.6	%		93.5	%		91.9	%		90.9	%		94.9	%


(1)		Consists of revenues from property management and landscape services provided to properties owned by third parties. These businesses were sold in the fourth quarter of 2001.

(2)		Income (loss) from continuing operations in 2005 includes a $5,267 gain on sale of technology investment and severance charges of $796. Income (loss) from continuing operations in 2004 included the impact of costs associated with the termination of a debt remarketing agreement (interest expense) and an early debt extinguishment loss totaling $14,626. See note 3 to the consolidated financial statements for a discussion of these costs. Income (loss) from continuing operations in 2003 included the impact of severance and proxy costs totaling $26,737. See note 7 to the consolidated financial statements for a discussion of these costs. Income from continuing operations in 2001 included the impact of project abandonment, employee severance and other charges totaling $17,450.

(3)		Upon the implementation of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” on January 1, 2002, the operating results of real estate held for sale and sold are reported as discontinued operations for all years presented. Additionally, all gains and losses on the sale of assets classified as held for sale subsequent to January 1, 2002 are included in discontinued operations. As the operating results and gains or losses from the sale of real estate assets prior to January 1, 2002 are included in continuing operations, the presentation of results are not comparable between years.

(4)		Includes the impact of $695 resulting from the cumulative effect of accounting change from the Company’s adoption of SFAS No. 133 in 2001.

(5)		Calculated based on fully stabilized communities as defined for each year (unadjusted for the impact of assets designated as held for sale in subsequent years). 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 net concessions and employee discounts (average economic occupancy, taking account of these amounts, would have been 94.0%, 93.0%, 90.8%, 89.1% and 93.8% for the years ended December 31, 2005, 2004, 2003, 2002 and 2001, respectively). Net concessions were $947, $621, $2,518, $4,215 and $1,860 for the years ended December 31, 2005, 2004, 2003, 2002 and 2001, respectively. Employee discounts were $398, $442, $535, $660 and $895 for the years ended December 31, 2005, 2004, 2003, 2002 and 2001, 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.
Post Apartment Homes, L.P.


ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands, except apartment unit data)

Company Overview

Post Properties, Inc. and its subsidiaries develop, own and manage upscale multifamily communities in selected markets in the United States. As used in this report, 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 December 31, 2005, the Company owned 21,442 apartment units in 58 apartment communities, including 545 apartment units in two communities held in unconsolidated entities and 205 apartment units currently under development in one community. The Company is also developing 145 for-sale condominium homes and is converting 597 apartment units (including 121 units in one community held in an unconsolidated entity) into for-sale condominium homes through a taxable REIT subsidiary. At December 31, 2005, approximately 46.8%, 18.5%, 9.3% and 8.9% (on a unit basis) of the Company’s operating communities were located in the Atlanta, Dallas, the greater Washington D.C. and Tampa 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 is generally not subject to federal income tax on the income it distributes to its shareholders.

At December 31, 2005, the Company owned approximately 96.7% of the common limited partnership interests (“Common Units”) in the Operating Partnership. Common Units held by persons other than the Company represented a 3.3% common minority interest in the Operating Partnership.

In prior years, beginning in 2001 and leading into 2004, the multifamily apartment sector was adversely impacted by the supply of multifamily apartments outpacing demand, due primarily to the availability of capital and the low interest rate environment, demand for multifamily apartments that was adversely impacted by weakness in the overall U.S. economy and the job market, as well as increased rates of homeownership due primarily to historically low mortgage interest rates. In particular, the Sunbelt markets in which a substantial portion of the Company’s apartment communities are located were adversely impacted.

In 2005, the Company’s operating results benefited from improved fundamentals in the multifamily apartment market. The Company believes that fundamentals improved due primarily to improved job growth and overall growth in the U.S. economy, increasing mortgage interest rates and single-family housing prices which have decreased the affordability of housing, and moderation in the supply of new market-rate apartments in the primary markets and submarkets where the Company operates.

The Company has also been active over the past several years repositioning its real estate portfolio and building its development and value creation capabilities centered upon its Southeast, Southwest and Mid-Atlantic regions. During this time, the Company has been a net seller of apartment assets in an effort to exploit opportunities to harvest value and recycle capital through the sale of non-core assets that no longer met the Company’s growth objectives. The Company’s asset sales program has been consistent with its strategy of reducing its concentration in Atlanta, Georgia and Dallas, Texas, building critical mass in fewer markets and leveraging the Post® brand in order to improve operating efficiencies. The Company has redeployed capital raised from its asset sales to strengthen its balance sheet, by reducing high-coupon preferred equity and debt, and reinvesting in assets that the Company believes demonstrate better growth potential.

In this regard, the Company acquired a 499-unit apartment community located in the greater Washington, D.C. area in 2004, a 319-unit apartment community located in Charlotte, North Carolina in 2005, and two apartment communities located in Austin, Texas in early 2006, consisting of 160 units and 148 units, respectively. The Company also re-commenced development activities with its start of a new 350-unit mixed-use, for-rent apartment and for-sale condominium project located in Alexandria, Virginia at the end of 2004.

In early 2005, the Company entered the for-sale condominium housing market to exploit the strategic opportunity for Post to serve those consumers who are choosing to own, rather than rent, their home. As a result, the Company launched a new

Post Properties, Inc.
Post Apartment Homes, L.P.

for-sale brand, Post Preferred Homes™, which serves as the unified marketing umbrella for the Company’s for-sale ventures, including developing new communities and converting existing assets into upscale for-sale housing in several key markets.

During 2005, the Company, through a taxable REIT subsidiary, commenced the conversion of three existing apartment communities consisting of a total of 382 units into for-sale condominium homes, including one in an unconsolidated entity, located in Atlanta, Georgia, Dallas, Texas and Tampa, Florida. One of these communities, containing 134 units, located in Tampa, Florida, was completely sold out in 2005. During 2006, the Company, through a taxable REIT subsidiary, also commenced the conversion of a portion of two additional existing apartment communities consisting of a total of 349 units into for-sale condominium homes, located in Houston, Texas and Tampa, Florida. These two communities are expected to begin sales of condominium homes in the second quarter of 2006. There can be no assurances, however, that the sale of for-sale condominium homes will close.

The Company’s expansion into for-sale condominium housing exposes the Company to new risks and challenges, which if they materialize, could have an adverse impact on the Company’s business, results of operations and financial condition. See Risk Factors elsewhere in this Form 10-K where discussed further.

The following discussion should be read in conjunction with the selected financial data and with all of the accompanying consolidated financial statements appearing elsewhere in this report. This discussion is combined for the Company and the Operating Partnership as their results of operations and financial condition are substantially the same except for the effect of the 5.0% weighted average common minority interest in the Operating Partnership. See the summary financial information in the section below titled, “Results of Operations”.

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. In addition, the Company, or the executive officers on the Company’s behalf, may from time to time make forward-looking statements in reports and other documents the Company files with the SEC or in connection with oral statements made to the press, potential investors or others. 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. Forward-looking statements include statements preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “plans,” “estimates,” or similar expressions. Examples of such statements in this report include anticipated apartment community sales in 2006 (including the estimated proceeds, estimated gains on sales and the use of proceeds from such sales), anticipated conversion of apartment communities into condominium units, development of new for-sale condominium housing and the related sales of the for-sale condominium units, anticipated future acquisition and development activities, accounting recognition and measurement of guarantees, anticipated refinancing and other new financing needs, the anticipated dividend level in 2006, the Company’s ability to meet new construction, development and other long-term liquidity requirements, and its ability to execute future asset sales. Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on beliefs and assumptions of the Company’s management, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding the market for the Company’s apartment communities, demand for apartments in the markets in which it operates, competitive conditions and general economic conditions. These assumptions could prove inaccurate. The forward-looking statements also involve risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond the Company’s ability to control or predict. Such factors include, but are not limited to, the following:

Post Properties, Inc.
Post Apartment Homes, L.P.

•

The success of the Company’s business strategies described on pages 2-3 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, as amended;

•

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 residents in the Company’s apartment communities and buyers of the Company’s for-sale condominium units and development locations;

•

The Company’s ability to obtain financing or self-fund the development or acquisition of additional apartment communities and for-sale condominium housing;

•

The uncertainties associated with the Company’s real estate development, including actual costs exceeding the Company’s budgets or development periods exceeding expectations;

•

Uncertainties associated with the timing and amount of apartment community sales and the resulting gains/losses associated with such sales;

•

Uncertainties associated with the Company’s condominium conversion and for-sale housing business, including the timing and volume of condominium sales;

•

Conditions affecting ownership of residential real estate and general conditions in the multi-family residential real estate market;

•

Uncertainties associated with environmental and other regulatory matters, including the Americans with Disabilities Act and the Fair Housing Act;

•

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;

•

The Company’s ability to continue to qualify as a REIT under the Internal Revenue Code; and

•

Other factors, including the risk factors discussed on pages 7 through 15 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, as amended.

Management believes these forward-looking statements are reasonable; however, undue reliance should not be placed on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and management undertakes no obligation to update publicly any of them in light of new information or future events.

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, there are new accounting pronouncements issued in 2005 and 2004 that may have an impact on future reported results. The potential impact of certain new pronouncements on the Company is discussed below and in the consolidated financial statements. As the Company is in the business of developing, owning and managing apartment communities and developing, converting and selling for-sale condominiums, its critical accounting policies, ones that are subject to significant management estimates and adjustments, relate to cost capitalization, asset impairment evaluation and revenue and profit recognition of for-sale condominium activities.

For communities under development, the Company capitalizes interest, real estate taxes, and certain internal personnel and associated costs directly related to apartment communities under development and construction. Interest capitalized to projects under development can fluctuate significantly from year to year based on the level of projects under development and to a lesser extent, changes in the weighted average interest rate used in the calculation. For the years ended December 31, 2005, 2004 and 2003, the Company capitalized interest totaling $2,907, $1,078 and $3,555, respectively. The increase in 2005 primarily relates to increased development activity as the Company is initiating new projects. The decline from 2003 to 2004 was principally due to an intentional reduction in the size of the Company’s development pipeline. The weighted average interest rates used in the calculation of the capitalized interest amounts ranged from 6.5% in 2005 to 7.0% in 2003 and, as a result, were not the primary driver of the changes in interest capitalization discussed above. In future periods, the Company anticipates an increase in development activity which will result in increased interest capitalization over 2005 levels. Aggregate interest capitalization increases are expected even as the average interest rate used in the calculation is expected to be substantially the same as in 2005. Due to the predominately fixed rate nature of the Company’s debt, future increases or decreases in short-term interest rates are not expected to have a significant impact on the weighted average interest rate used for interest capitalization purposes. Future increases in long-term interest rates over time would cause an increase in the weighted average rate used for capitalization and cause interest amounts capitalized to increase.

Post Properties, Inc.
Post Apartment Homes, L.P.

Internal personnel and associated costs are capitalized to the projects under development based upon the effort identifiable with such projects. As the Company intentionally slowed its development efforts due to a weaker economic environment in 2003 and 2004, the Company capitalized less to development projects. The Company elected to retain certain development personnel and capabilities during this period in order to position the Company for increased development activities in future years. In 2004 and 2003, the Company expensed $1,651 and $1,423, respectively, of development personnel and associated costs. In 2005, the Company increased its development personnel in three regional geographic areas in anticipation of increased development activity in 2005 and in future periods. In 2005, the Company expensed $3,165 of development personnel and associated costs. If future development volume increases over 2005 levels, the majority of such costs may be capitalized to development projects.

The Company continually evaluates the recoverability of the carrying value of its real estate assets using the methodology summarized in its accounting policies (see note 1 to the consolidated financial statements). Under current accounting literature, the evaluation of the recoverability of the Company’s real estate assets requires the judgment of Company management in the determination of the value of the future cash flows expected from the assets and the estimated holding period for the assets. The Company uses market capitalization rates to determine the estimated residual value of its real estate assets (capitalization rates generally ranged from 4.5% to 6.0% at December 31, 2005) and, generally, takes a long-term view of the holding period of its assets unless specific facts and circumstances warrant shorter holding periods (expected sales, departures from certain geographic markets, etc.). At December 31, 2005 and 2004, management believed it had applied reasonable estimates and judgments in determining the proper classification of its real estate assets. Should external or internal circumstances change requiring the need to shorten the holding periods or adjust the estimated future cash flows of certain of the Company’s assets, the Company could be required to record future impairment charges. As discussed in note 5 to the consolidated financial statements, the Company recorded impairment losses in 2004 and 2003 on assets held for sale or for investment under the application of its policies.

In 2005, the Company entered into the for-sale condominium business through the conversion of three apartment communities (including one held in an unconsolidated entity) into condominiums. Under SFAS No. 66, the Company recognizes revenue and the resulting profit from condominium sales based on the relevant facts and circumstances associated with each condominium project. For condominium conversion projects, revenues are recognized upon the closing of each sale transaction (the “Completed Contract Method”), as all conditions for full profit recognition are generally met at the time and the conversion construction periods are typically very short. In 2005, all condominium sales were at condominium conversion projects.

Under SFAS No. 66, the Company uses the relative sales value method to allocate costs and recognize profits from condominium conversion sales. Under the relative sales value method, estimates of aggregate project revenues and aggregate project costs are used to determine the allocation of project cost of sales and the resulting profit in each accounting period. In subsequent periods, project cost of sale allocations and profits are adjusted to reflect changes in the actual and estimated costs and estimated revenues of each project. Unexpected increases or decreases in estimated project revenues and project costs could cause future cost of sale and profit margin amounts recognized in the financial statements to be different than the amounts recognized in prior periods. Due to the sell out and substantial sell out of two of the three conversion communities in 2005, the Company does not expect the impact of these estimates to have a material impact on the profit margins recognized in 2005. As the Company continues to be active in the condominium business in future periods, the changes in such estimates would have a more significant impact on reported results.

For newly developed condominiums, the Company will evaluate the factors specified in SFAS No. 66 to determine the appropriate method of accounting for each project (either the “Percentage of Completion Method” or the Completed Contract Method). The factors used to determine the appropriate method are a determination of whether: the purchaser is legally committed to closing in the real estate contract; the construction of the project is beyond a preliminary phase; sufficient units have been contracted to ensure the project will not revert to a rental project; the aggregate project sale proceeds and costs can be reasonably estimated; and the buyer has made an adequate initial and continuing cash investment under the contract in accordance with SFAS No. 66. Under the Percentage of Completion Method, revenues and the associated profit would be recognized over the project construction period based on the ratio of total project costs incurred to estimated total project costs. The determination of the profit margins to be reported also requires an estimate of the estimated aggregate revenues to be generated from condominium sales. Increases in estimated revenues and decreases in estimated costs over time would lead to increased profit recognition in future periods. Likewise, decreases in estimated revenues and increases in estimated costs over time would lead to reductions in profit margins in future periods. Additionally, contracts terminated prior to closing under the Percentage of Completion Method would result in the reversal of previously recognized profits and such amounts could be material under market conditions that would lead to a general market value decline for condominiums.

Post Properties, Inc.
Post Apartment Homes, L.P.

At December 31, 2005, the Company has one new condominium project under development with approximately 50% of the condominium units under contract. As the initial and continuing cash investments received do not meet the requirements of SFAS No. 66, as well as other factors, the Company has concluded that this project will be accounted for under the Completed Contract Method, similar to the accounting for condominium conversion projects discussed above.

SFAS No. 123R, “Share-Based Payment”, was issued in December 2004. SFAS No. 123R revised 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 superseded the provisions of APB No. 25. The provisions of SFAS No. 123R were effective on January 1, 2006. The Company adopted the provisions of SFAS No. 123R on January 1, 2006 using the modified prospective method of adoption. Since the Company elected to apply the provisions of SFAS No. 123 on January 1, 2003, the adoption of SFAS No. 123R will not have a significant impact on the Company’s financial position or results of operations.

FASB Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations” was issued in March 2005. FIN 47 is an interpretation of SFAS No. 143, “Accounting for Asset Retirement Obligations,” and addressed liability recognition issues under SFAS No. 143 related to the timing and/or method of settlement of retirement obligations that are conditional on future events. FIN 47 was effective as of December 31, 2005. The Company has assessed the impact of FIN 47 and has determined that the provisions of FIN 47 did not have a material impact on the Company’s financial position or results of operations at December 31, 2005. The application of FIN 47 requires significant management estimates and judgments regarding the impact of future events. Management believes it has applied reasonable judgments and estimates in reaching its determination. As a multifamily company, the Company’s operations do not generally give rise to the types of retirement obligations requiring accounting recognition. In future periods, the Company could acquire land or older operating assets that may contain conditions requiring the recognition of liabilities under FIN 47.

The Emerging Issues Task Force issued EITF No. 04-5 (“EITF No. 04-5”), “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights”. EITF No. 04-5 provides a framework for evaluating whether a general partner or group of general partners or managing members controls a limited partnership or limited liability company and therefore should consolidate the entity. The presumption that the general partner or group of general partners or managing members controls a limited liability partnership or limited liability company may be overcome if the limited partners or members have (1) the substantive ability to dissolve the partnership without cause, or (2) substantive participating rights. EITF No. 04-5 became effective on June 30, 2005 for new or modified limited partnerships or limited liability companies and January 1, 2006 for all existing arrangements. The Company does not believe that the adoption of EITF No. 04-5 will have a material impact on the Company’s financial position or results of operations.

Results of Operations

The following discussion of results of operations should be read in conjunction with the consolidated statements of operations, the accompanying selected financial data and the community operations/segment performance information included below.

The Company’s revenues and earnings from continuing operations are generated primarily from the operation of its apartment communities. For purposes of evaluating comparative operating performance, the Company categorizes its operating apartment communities based on the period each community reaches stabilized occupancy. The Company generally considers a community to have achieved stabilized occupancy on the earlier to occur of (1) attainment of 95% physical occupancy on the first day of any month or (2) one year after completion of construction.

For the year ended December 31, 2005, the Company’s portfolio of operating apartment communities, excluding two communities held in unconsolidated entities, consisted of the following: (1) 48 communities that were completed and stabilized for all of the current and prior year, (2) one community that achieved full stabilization during 2004, (3) portions of two communities that are being converted into condominiums that are reflected in continuing operations under SFAS No. 144 (see note 1 to the consolidated financial statements) and (4) two communities that were acquired in 2005 and 2004. These operating segments exclude the operations of apartment communities classified as discontinued operations (including four apartment communities classified as held for sale for the nine months ended September 30, 2006), condominium conversion communities classified as discontinued operations and apartment communities held in unconsolidated entities for the years presented.

The Company has adopted an accounting policy related to communities in the lease-up stage whereby substantially all operating expenses (including pre-opening marketing and management and leasing personnel expenses) are expensed as incurred. During the lease-up phase, the sum of interest expense on completed units and other operating expenses (including

Post Properties, Inc.
Post Apartment Homes, L.P.

pre-opening marketing and management and leasing personnel 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, 2005, 2004 and 2003 were $0, $0 and $3,574, respectively.

In order to evaluate the operating performance of its communities for the comparative years listed below, the Company has presented financial information which summarizes the rental and other revenues, property operating and maintenance expenses (excluding depreciation and amortization) and net operating income on a comparative basis for all of its operating communities and for its stabilized operating communities. Net operating income is a supplemental non-GAAP financial measure. 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. Net operating income is reconciled to GAAP net income in the financial information accompanying the tables. 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. 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.

Comparison of Year Ended December 31, 2005 to Year Ended December 31, 2004

The operating performance from continuing operations for all of the Company’s apartment communities summarized by segment for the years ended December 31, 2005 and 2004 is summarized as follows:


	Year ended December 31,
	2005		2004		% Change
Rental and other property revenues
Fully stabilized communities (1)	$	234,803	$	227,823		3.1	%
Communities stabilized in 2004		7,184		7,007		2.5	%
Condominium conversion communities (2)		5,485		5,716		(4.0	)%
Acquired communities (3)		10,808		4,477		141.4	%
Other property segments (4)		21,961		20,769		5.7	%

		280,241		265,792		5.4	%


Property operating and maintenance expenses (exclusive of depreciation and amortization)
Fully stabilized communities (1)		91,371		88,472		3.3	%
Communities stabilized in 2004		2,227		2,122		4.9	%
Condominium conversion communities (2)		1,872		2,041		(8.3	)%
Acquired communities (3)		3,578		1,313		172.5	%
Other property segments and other expenses (5)		29,067		27,472		5.8	%

		128,115		121,420		5.5	%

Property net operating income (6)	$	152,126	$	144,372		5.4	%


Capital Expenditures
Recurring capital expenditures: (7)(8)
Carpet	$	2,911	$	2,423		20.1	%
Other		5,780		4,992		15.8	%

Total	$	8,691	$	7,415		17.2	%

Non-recurring capital expenditures	$	4,288	$	3,665		17.0	%

Average apartment units in service		19,331		19,204		0.7	%


(1)		Communities which reached stabilization prior to January 1, 2004.

(2)		Portions of existing apartment communities being converted into condominiums that are reflected in continuing operations under SFAS No. 144.

(3)		Communities acquired subsequent to January 1, 2004.

(4)		Other property segment revenues include revenues from commercial properties, revenues from furnished apartment rentals above the unfurnished rental rates and any property revenue not directly related to property operations. Other property segment revenues exclude other corporate revenues of $255 and $1,000 for the years ended December 31, 2005 and 2004, respectively.

(5)		Other expenses include certain indirect central office operating expenses related to management, grounds maintenance, and costs associated with commercial properties and furnished apartment rentals.

Post Properties, Inc.
Post Apartment Homes, L.P.

(6)

A reconciliation of property net operating income to GAAP net income is detailed below.


	Year ended December 31,
	2005			2004
Total same store NOI	$	143,432		$	139,351
Property NOI from other operating segments		8,694			5,021

Consolidated property NOI		152,126			144,372
Add (subtract):
Other revenues		255			1,000
Interest income		661			817
Minority interest in consolidated property partnerships		239			671
Depreciation		(70,435	)		(73,665	)
Interest expense		(55,638	)		(59,763	)
Amortization of deferred financing costs		(4,661	)		(4,304	)
General and administrative		(18,307	)		(18,205	)
Investment, development and other expenses		(5,242	)		(2,930	)
Severance charges		(796	)		—
Equity in income of unconsolidated entities		1,767			1,083
Gain on sale of technology investment		5,267			—
Termination of debt remarketing agreement (interest expense)		—			(10,615	)
Loss on early extinguishment of indebtedness		—			(4,011	)
Minority interest of preferred unitholders		—			(3,780	)
Minority interest of common unitholders		120			2,615

Income (loss) from continuing operations		5,356			(26,715	)
Income from discontinued operations		136,592			114,934

Net income	$	141,948		$	88,219


(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. Recurring capital expenditures are those that are generally expected to be incurred on an annual basis. Non-recurring capital expenditures are those that generally occur less frequently than on an annual basis.

(8)		A reconciliation of property capital expenditures from continuing operations to total recurring and non-recurring capital expenditures as presented in the consolidated statements of cash flows under GAAP is detailed below.


	Year ended December 31,
	2005		2004
Recurring capital expenditures
Continuing operations	$	8,691	$	7,415
Discontinued operations		1,230		2,469

Total recurring capital expenditures per statements of cash flows	$	9,921	$	9,884


Non-recurring capital expenditures
Continuing operations	$	4,288	$	3,665
Discontinued operations		220		940

Total non-recurring capital expenditures per statements of cash flows	$	4,508	$	4,605

The Operating Partnership reported net income available to common unitholders of $141,410 and $81,546 for the years ended December 31, 2005 and 2004, respectively, and the Company reported net income available to common shareholders of $134,311 and $76,368 for the years ended December 31, 2005 and 2004, respectively. The improvement in net income in 2005 compared to 2004 primarily reflected increased gains on sales of real estate assets of $27,498 ($26,958 net of minority interest and income taxes) and a gain of $5,267 ($5,003 net of minority interest) on the sale of technology investment between years. The change between years was also impacted by accounting charges in 2004 of $20,987 ($19,637 net of minority interest) relating to losses on early debt extinguishments, costs of terminating a debt remarketing agreement (interest expense) and asset impairment charges compared to debt extinguishment losses of $3,220 ($3,043 net of minority interest) in 2005. Additionally, net income was higher in 2005 due to the improved operating performance of the Company’s stabilized communities and reduced interest expense. These items are discussed in more detail in the sections below.

Rental and other revenues increased $14,449 or 5.4% from 2004 to 2005 primarily due to increased revenues from the Company’s stabilized communities of $6,980 or 3.1% and from the Company’s newly stabilized and acquired communities of $6,508 or 56.7%. The revenue increase from stabilized communities is discussed below. The revenue increase from newly stabilized communities in 2005 reflects a full year of operating performance in 2005 for the one community compared to a partial lease-up year in 2004. The revenue increase from acquired communities reflects the acquisition of one community in May 2005 and one community in June 2004. Property operating and maintenance expenses (exclusive of depreciation and amortization) increased $6,695 or 5.5% primarily due to increased expenses from stabilized communities and acquisition communities. The expense increase

Post Properties, Inc.
Post Apartment Homes, L.P.

from stabilized communities is discussed below. The expense increase from acquisition communities reflects the full year of expenses from one community acquired in June 2004 and a partial year of expenses for the community acquired in May 2005.

In 2005, gains on sales of real estate assets from discontinued operations represent the net gains of $16,218 ($15,404 net of minority interest and provision for income taxes) from condominium sales at the Company’s condominium conversion communities and gains of $124,425 ($117,593 net of minority interest) on the sale of six communities containing 3,047 units. The sales of the six communities generated net proceeds of approximately $229,249, including $81,560 of tax-exempt secured indebtedness assumed by the purchasers. In 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. These sales generated net proceeds of approximately $242,962, including $104,325 of tax-exempt debt assumed by the purchasers. The Company plans to continue to be a seller of communities based on an assessment of market conditions and consistent with its investment strategy of recycling investment capital to fund new development and acquisition activities in its core markets.

Depreciation expense decreased $3,230, or 4.4% from 2004 to 2005 primarily due to reduced depreciation resulting from certain furniture and fixtures (with a five year life) at certain properties becoming fully depreciated in 2004 and early 2005 offset by increased depreciation from communities acquired in 2005 and 2004.

Interest expense (excluding $10,615 in 2004 of costs associated with the termination of a debt remarketing agreement – discussed below) decreased $4,125 or 6.9% from 2004 to 2005 due to reduced interest costs resulting from the refinancing of approximately $112,000 of debt at lower fixed interest rates, net debt repayments of fixed rate unsecured indebtedness of approximately $100,000 during 2005 and due to $1,829 of increased capitalized interest to development properties between years.

In 2004, the Company terminated a remarketing agreement related to its $100,000, 6.85% Mandatory Par Put Remarketed Securities (“MOPPRS”) due March 2015. In connection with the termination of the remarketing agreement, the Company paid $10,615, including transaction expenses. Under the terms of the remarketing agreement, the remarketing agent had the right to remarket the $100,000 unsecured notes in March 2005 for a ten-year term at an interest rate calculated as 5.715% plus the Company’s then current credit spread to the ten-year treasury rate. As a result of the termination of the remarketing agreement, the underlying debt matured and was repaid in March 2005.

The loss on early extinguishment of indebtedness included in continuing operations in 2004 of $4,011 represented the debt repurchase premiums, transactions expenses and the write-off of unamortized deferred financing costs associated with the early retirement of debt. In October 2004, the Company purchased and retired $87,957 of the Company’s 8.125% medium term, unsecured notes through a tender offer. The debt was originally scheduled to mature in 2005. The Company retired a portion of this debt prior to maturity to take advantage of favorable lower interest rates in late 2004 and to reduce its debt refinancing risk in 2005.

General and administrative expenses increased $102 or 0.6% from 2004 to 2005 primarily due to increased compensation, incentive compensation and board compensation costs offset by reduced legal, consulting and corporate governance expenses in 2005. The increase in annual compensation reflects annual compensation increases and increased bonuses paid to corporate employees in 2005 due to improved Company performance. The increase in incentive compensation reflects the increased amortization of incentive stock awards as option award expense recognition has increased due to the full phase-in of SFAS No. 123 over an approximately three year vesting period that began in 2003. Additionally, incentive compensation increased due to increased restricted stock and shareholder value plan award amortization (phased in over an approximately three year vesting period as restricted stock and shareholder value plan awards began to be granted annually beginning in 2003). Increased board compensation costs resulted from increases in a director variable deferred compensation plan which resulted from increases in the Company’s stock price. This director plan was amended in the third quarter of 2005. As a result, future changes in the Company’s stock price are not expected to have an impact on board compensation costs. These increases were offset by reduced legal expenses of $834 between years primarily due to reduced expenses associated with shareholder proxy proposals, the settlement with the Company’s former chairman and CEO in 2004 and with shareholder litigation between periods. The decrease in consulting expenses of approximately $620 between periods related to portfolio valuation and software selection services incurred in 2004. Corporate governance expenses decreased approximately $307 due to a reduction in the costs of Sarbanes/Oxley compliance in the second full year of those regulations.

Post Properties, Inc.
Post Apartment Homes, L.P.

primarily included certain investment group executive and administrative functions and long-term, stock-based compensation and benefits expenses associated with property management and investment and development group activities.

Investment, development and other costs increased $2,312 or 78.9% from 2004 to 2005. Investment, development and other costs of $5,242 in 2005 include $1,546 of executive and administrative functions, $3,165 of development personnel and associated costs and land carry costs not allocable to development projects and $531 of sales and marketing costs associated with for-sale condominium developments which are not capitalized. Investment, development and other costs of $2,930 in 2004 consisted of $1,279 of executive and administrative functions and $1,651 of development personnel and associated costs and land carry expenses not allocable to development projects. The majority of the increase in development personnel and associated costs of $1,514, which was primarily due to the addition of new development personnel and to establishing development capabilities in three regional geographic areas in mid to late 2004 and into 2005.

Equity in income of unconsolidated real estate entities increased from $1,083 in 2004 to $1,767 in 2005. This increase was primarily due to improving apartment market fundamentals resulting in improved operating performance of the two communities held by the entities and increased profits resulting from condominium sales at one of the unconsolidated entities that began the conversion of its apartments into for-sale condominiums in 2005. The first closings of condominium units began in the second quarter of 2005. In 2005, the unconsolidated entity closed 45 condominium units generating net gains to the Company of approximately $612.

Recurring and nonrecurring capital expenditures from continuing operations increased $1,899 or 17.1% from 2004 to 2005. The increase in capital expenditures included one capital project related to corrective improvements associated with compliance with ADA regulations and the impact of several properties beginning to capitalize the replacement of carpet, vinyl and blinds under the Company’s accounting policies (during the first five years of a community, the Company expenses the replacements of these items).

Fully Stabilized (Same Store) Communities

The Company defines fully stabilized communities as those which have reached stabilization prior to the beginning of the previous year. For the 2005 to 2004 comparison, fully stabilized communities are defined as those communities which reached stabilization prior to January 1, 2004. This portfolio consisted of 48 communities with 18,153 units, including 22 communities with 8,842 units (48.7%) located in Atlanta, Georgia, 13 communities with 3,939 units (21.7%) located in Dallas, Texas, three communities with 1,883 units (10.4%) located in Tampa, Florida, three communities with 1,204 units (6.6%) located in Washington D.C. and seven communities with 2,285 units (12.6%) located in other markets. The operating performance of these communities is summarized as follows:


	Year ended December 31,
	2005			2004			% Change
Rental and other revenues	$	234,803		$	227,823			3.1	%
Property operating and maintenance expenses (excluding depreciation and amortization)		91,371			88,472			3.3	%

Same store net operating income (1)	$	143,432		$	139,351			2.9	%

Capital expenditures (2)
Recurring
Carpet	$	2,540		$	2,273			11.7	%
Other		5,345			4,840			10.4	%

Total recurring		7,885			7,113			10.9	%
Non-recurring		3,328			2,927			13.7	%

Total capital expenditures(A)	$	11,213		$	10,040			11.7	%

Total capital expenditures per unit(A÷18,153 units)	$	618		$	553			11.8	%

Average monthly rental per apartment unit (3)	$	1,057		$	1,038			1.8	%

Average economic occupancy (4)		94.6	%		93.7	%		0.9	%


(1)		Net operating income of stabilized communities is a supplemental non-GAAP financial measure. See page 29 for a reconciliation of net operating income for stabilized communities to GAAP net income.

Post Properties, Inc.
Post Apartment Homes, L.P.

(2)

A reconciliation of these segment components of property capital expenditures to total recurring and non-recurring capital expenditures as presented in the consolidated statements of cash flows prepared under GAAP is detailed below.


	Year ended December 31,
	2005		2004
Recurring capital expenditures by operating segment Fully stabilized	$	7,885	$	7,113	(5)
Stabilized in prior year		13		25
Condominium conversion communities		132		84	(5)
Acquired		488		166
Other property segments, including discontinued operations		1,403		2,496

Total recurring capital expenditures per statements of cash flows	$	9,921	$	9,884


Non-recurring capital expenditures by operating segment Fully stabilized	$	3,328	$	2,927	(5)
Stabilized in prior year		—		—
Condominium conversion communities		75		263	(5)
Acquired		69		5
Other property segments, including discontinued operations		1,036		1,410

Total non-recurring capital expenditures, per statements of cash flows	$	4,508	$	4,605


		The Company uses same store recurring and non-recurring capital expenditures as cash flow measures. Same store recurring and non-recurring capital expenditures are supplemental non-GAAP financial measures. The Company believes that same store recurring and non-recurring capital expenditures are important indicators of the costs incurred by the Company in maintaining same store communities. The corresponding GAAP measures include information with respect to the Company’s other operating segments consisting of communities stabilized in the prior year, condominium conversion communities, lease-up communities, and sold communities in addition to same store information. Therefore, the Company believes that it’s presentation of same store recurring and non-recurring capital expenditures is necessary to demonstrate same store replacement costs over time. The Company believes that the most directly comparable GAAP measure to same store recurring and non-recurring capital expenditures are the lines on the Company’s consolidated statements of cash flows entitled “recurring capital expenditures” and “non-recurring capital expenditures.”

(3)		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, divided by total units. In the fourth quarter of 2005, the Company adjusted its stated market rents at the majority of its communities to be more reflective of current market conditions. The impact of this change is estimated to have reduced the average monthly rental rate per unit by less than 1% for the year ended December 31, 2005.

(4)		Average economic occupancy is defined as gross potential rent less vacancy losses, model expenses and bad debt expenses divided by gross potential rent for the period, expressed as a percentage. In the fourth quarter of 2005, the Company adjusted its stated market rents at the majority of its communities to be more reflective of current market conditions. The impact of this change is estimated to have increased the computed average economic occupancy amounts by less than 1% for the year ended December 31, 2005. Gross potential rent is defined as the sum of the gross actual rental rates for leased units and the anticipated rental rates for unoccupied units. The calculation of average economic occupancy does not include a deduction for net concessions and employee discounts. Average economic occupancy including these amounts would have been 94.0% and 93.2% for the years ended December 31, 2005 and 2004, respectively. For the years ended December 31, 2005 and 2004, net concessions were $947 and $716, respectively, and employee discounts were $398 and $427, respectively.

(5)		These amounts were adjusted from previously reported amounts to properly reflect capital expenditures for partial condominium conversion communities and for stabilized communities.

Rental and other revenues increased $6,980 or 3.1% from 2004 to 2005. This increase resulted primarily from a 1.8% increase in the average monthly rental rate per apartment unit and an increase in average economic occupancy of the portfolio from 93.7% to 94.6%. This increase in average rental rates resulted in a revenue increase of approximately $4,090 between years. The occupancy increase resulted in lower vacancy losses of $1,467. Additionally, other property revenues increased $1,654 as a result of higher up-front leasing fees and higher utility reimbursements from residents due to increased utility expenses, but were offset somewhat by higher net concessions of $231 due to the impact of straight-lining net rentals and concessions under generally accepted accounting principles. Overall, the improving performance of the operating portfolio reflects gradually improving market conditions with the Company’s operations in all of its markets reporting increased revenues over the prior year. With modestly increasing occupancy rates in 2005, the Company’s strategy continues to be focused on increasing average rental rates in 2006 as the Company’s markets continue to show general economic improvement.

Property operating and maintenance expenses (exclusive of depreciation and amortization) increased $2,899 or 3.3% from 2004 to 2005. This increase was primarily due to increased utility expenses of $1,245 or 11.1%, increased maintenance and repairs expenses of $1,333 or 14.1% and increased ground rent expenses of $1,286 or 94.1%, offset by decreased property tax expenses of $771 or 2.6% and decreased insurance expenses of $617 or 13.9%. Utility expenses increased primarily due to higher electricity rates at certain properties in the Company’s Texas markets and generally higher rates for all utilities in the second half of 2005. Repairs and maintenance expenses increased primarily due to increased exterior painting costs of $1,165 between periods. The increase in ground rent expense of $1,286 reflects the impact of straight-lining long-term ground lease payments associated with leases with stated rent escalations (the straight-lining of ground rents resulted in $1,251 of the increase) in 2005. The decrease in property tax expenses in 2005 reflected reduced tax expense from favorable tax valuations from taxing authorities in 2005 and from prior year tax settlements recorded in 2005. Insurance expenses declined in 2005 due primarily to favorable loss experience on the Company’s property insurance program.

Post Properties, Inc.
Post Apartment Homes, L.P.

Comparison of Year Ended December 31, 2004 to Year Ended December 31, 2003

For the purposes of comparative operating performance, the Company categorizes its operating communities based on the period each community reaches stabilized occupancy, as defined above. For the 2004 to 2003 comparison, the operating community categories were based on the status of each community as of December 31, 2004. As a result, these categories are different from the operating community categories used in the 2005 to 2004 comparison discussed earlier in this section. Further, the amounts reported in the table below have been adjusted from the amounts reported in the Company’s December 31, 2004 financial statements due to the restatement impact of reclassifying the operating results of assets designated as held for sale in 2005 and in the nine months ended September 30, 2006 to discontinued operations under SFAS No. 144 (see the related discussion under the caption, “Discontinued Operations”). The operating performance from continuing operations for all of the Company’s apartment communities combined for the years ended December 31, 2004 and 2003 is summarized as follows:


	Year ended December 31,
	2004		2003		% Change
Rental and other property revenues
Fully stabilized communities (1)	$	217,702	$	215,581		1.0	%
Communities stabilized in 2003		15,784		14,695		7.4	%
Development and lease-up communities (2)		7,001		2,006		249.0	%
Acquired communities (3)		4,472		—		—
Other property segments (4)		20,833		19,118		9.0	%

		265,792		251,400		5.7	%


Property operating and maintenance expenses (exclusive of depreciation and amortization)
Fully stabilized communities (1)		84,537		81,250		4.0	%
Communities stabilized in 2003		5,933		5,854		1.3	%
Development and lease-up communities (2)		2,122		1,893		12.1	%
Acquired communities (3)		1,309		—		—
Other property segments and other expenses (5)		27,519		23,126		19.0	%

		121,420		112,123		8.3	%

Property net operating income (6)	$	144,372	$	139,277		3.7	%


Capital Expenditures
Recurring capital expenditures: (7)(8)
Carpet	$	2,469	$	1,612		53.2	%
Other		4,946		3,874		27.7	%

Total	$	7,415	$	5,486		35.2	%

Non-recurring capital expenditures	$	3,665	$	4,236		(13.5	)%

Average apartment units in service		19,204		19,085		0.6	%


(1)		Communities which reached stabilization prior to January 1, 2003.

(2)		Communities in the “construction”, “development” or “lease-up” stage during 2003 and, therefore, not considered fully stabilized for all of the periods presented.

(3)		Communities acquired subsequent to January 1, 2003.

(4)		Other property segment revenues include revenues from commercial properties, revenues from furnished apartment rentals above the unfurnished rental rates and any property revenue not directly related to property operations. Other property segment revenues exclude other corporate revenues of $1,000 and $457 for the years ended December 31, 2004 and 2003, respectively.

(5)		Other property segments and other expenses include expenses associated with commercial properties and furnished apartment rentals as well as certain indirect central office operating expenses related to management and grounds maintenance.

Post Properties, Inc.
Post Apartment Homes, L.P.



(6)		A reconciliation of property net operating income to GAAP net income is detailed below.


	Year ended December 31,
	2004			2003
Total same store NOI	$	133,165		$	134,331
Property NOI from other operating segments		11,207			4,946

Consolidated property NOI		144,372			139,277
Add (subtract):
Other revenues		1,000			457
Interest income		817			894
Minority interest in consolidated property partnerships		671			1,605
Depreciation		(73,665	)		(71,832	)
Interest expense		(59,763	)		(58,309	)
Amortization of deferred financing costs		(4,304	)		(3,801	)
General and administrative		(18,205	)		(13,841	)
Investment, development and other costs		(2,930	)		(2,715	)
Termination of debt remarketing agreement (interest expense)		(10,615	)		—
Loss on early extinguishment of indebtedness		(4,011	)		—
Proxy contest and related costs		—			(5,231	)
Severance charges		—			(21,506	)
Equity in income of unconsolidated entities		1,083			7,790
Minority interest of preferred unitholders		(3,780	)		(5,600	)
Minority interest of common unitholders		2,615			4,532

Loss from continuing operations		(26,715	)		(28,280	)
Income from discontinued operations		114,934			42,436

Net income	$	88,219		$	14,156


(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. Recurring capital expenditures are those that are generally expected to be incurred on an annual basis. Non-recurring capital expenditures are those that generally occur less frequently than on an annual basis.

(8)		A reconciliation of property capital expenditures from continuing operations to total recurring and non-recurring capital expenditures as presented in the consolidated statements of cash flows under GAAP is detailed below.


	Year ended December 31,
	2004		2003
Recurring capital expenditures
Continuing operations	$	7,415	$	5,486
Discontinued operations		2,469		3,987

Total recurring capital expenditures per statements of cash flows	$	9,884	$	9,473


Non-recurring capital expenditures
Continuing operations	$	3,665	$	4,236
Discontinued operations		940		916

Total non-recurring capital expenditures per statements of cash flows	$	4,605	$	5,152

The Operating Partnership reported net income available to common unitholders of $81,546 and $3,048 for the years ended December 31, 2004 and 2003, respectively, and the Company reported net income available to common shareholders of $76,368 and $2,707 for the years ended December 31, 2004 and 2003, respectively. The improvement in net income in 2004 compared to 2003 primarily reflected increased gains on property sales of $72,947 ($69,542 net of minority interest) between years. The change between years was also impacted by larger accounting charges in 2003 of $44,199 ($39,232 net of minority interest) relating to severance, proxy contest and asset impairment charges compared to expense items in 2004 of $20,987 ($19,637 net of minority interest) relating to losses on early debt extinguishments, costs of terminating a debt remarketing agreement (interest expense) and asset impairment charges. These items are discussed in more detail in the sections below along with a discussion of the changes in the operating performance of the Company’s assets.

Rental and other revenues increased $14,392 or 5.7% from 2003 to 2004 primarily due to increased revenues from the Company’s lease-up and acquired communities of $9,467 or 471.9%. In addition, revenues from stabilized communities and newly stabilized communities increased from 2003 to 2004 due to improving market conditions between years. The revenue increase from lease-up communities in 2004 reflects almost a full year of operating performance in 2004 for the one community compared to an initial lease-up period in 2003. The revenue increase from acquired communities reflects the acquisition of one community in June 2004. Property operating and maintenance expenses (exclusive of depreciation and amortization) increased $9,297 or 8.3% primarily due to increased expenses from stabilized communities and increased management division expenses. The expense increase from stabilized communities is discussed below. The management division expense increase primarily reflects the impact of casualty losses to repair hurricane damage of $1,321 to the

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Company’s Florida communities, severance costs of $569 relating to the elimination of certain positions resulting from asset sales and other expense increases due to the increased volume of corporate apartment business in 2004.

In 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. These sales generated net proceeds of approximately $242,962, including $104,325 of tax-exempt debt assumed by the purchasers. In 2003, the Company recognized net gains from discontinued operations of $40,792 ($36,497 net of minority interest) on the sale of four communities containing 1,844 units and certain land parcels. These sales generated net proceeds of approximately $163,560.

Depreciation expense increased $1,833, or 2.6% from 2003 to 2004 primarily due to depreciation on a community acquired in June 2004 and due to increased depreciation on a lease-up community that was placed in service in 2003.

Interest expense (excluding $10,615 of costs associated with the termination of a debt remarketing agreement – discussed below) increased $1,454 or 2.5% from 2003 to 2004 primarily due to a $2,477 reduction in capitalized interest to development properties between years as the Company’s prior year development pipeline transitioned to operating properties through early 2003. Excluding the reduction in capitalized interest between periods, the combined interest expense in continuing and discontinued operations decreased by $4,253 or 5.7% between years. This decrease results from lower overall debt levels between years and lower interest rates on unsecured public debt refinanced in 2004. Lower debt levels in 2004 were a result of the partial use of 2003 and 2004 asset sales proceeds to reduce debt.

In December 2004, the Company terminated a remarketing agreement related to its $100,000, 6.85% Mandatory Par Put Remarketed Securities (“MOPPRS”) due March 2015. In connection with the termination of the remarketing agreement, the Company paid $10,615, including transaction expenses. Under the terms of the remarketing agreement, the remarketing agent had the right to remarket the $100,000 unsecured notes in March 2005 for a ten-year term at an interest rate calculated as 5.715% plus the Company’s then current credit spread to the ten-year treasury rate. As a result of the termination of the remarketing agreement, the underlying debt matured and was repaid in March 2005.

The loss on early extinguishment of indebtedness in 2004 of $4,011 represented the debt repurchase premiums, transaction expenses and the write-off of unamortized deferred financing costs associated with the early retirement of debt. In October 2004, the Company purchased and retired $87,957 of the Company’s 8.125% medium term, unsecured notes through a tender offer. The debt was originally scheduled to mature in 2005. The Company retired a portion of this debt prior to maturity to take advantage of favorable lower interest rates in October 2004 and to reduce its debt refinancing risk in 2005.

General and administrative expenses increased $4,364, or 31.5%, from 2003 to 2004 primarily due to higher expenses related to the amortization of incentive stock compensation awards, directors and officers insurance, legal, audit, corporate governance and other consulting expenses. The increase in legal expenses includes approximately $1,584 of additional costs associated with the settlement with the Company’s former chairman and CEO (see note 7 to the consolidated financial statements), shareholder litigation and other matters. The increase in audit and corporate governance expense includes approximately $1,164 of additional costs associated with the Company’s compliance with the Sarbanes/Oxley regulations. The increase in consulting expenses of approximately $620 between years reflects costs associated with a review and valuation of each asset in the Company’s real estate portfolio to assist with future capital investment decisions and strategic planning and professional services to assist with the selection of new property management software.

Investment, development and other costs increased $215 or 7.9% from 2003 to 2004. Investment, development and other costs of $2,930 in 2004 consisted of investment group executive management and administrative costs of $1,279 and development personnel and associated costs and land carry expenses not allocable to development projects of $1,651. Investment, development and other costs of $2,715 in 2003 included investment group executive management and administrative costs of $391, development personnel and associated costs and land carry expenses not allocable to development projects of $1,423, the write-off of the Company’s remaining investment in a property management software company of $276, legal expenses of $373 relating to board of directors governance and transition matters, the settlement cost of $100 relating to the bankruptcy of a former technology investment and losses of $152 on the disposal of the Company’s partial ownership interest in a corporate aircraft.

The Company recorded severance and proxy contest charges of $21,506 and $5,231, respectively, in 2003. These charges are discussed in more detail below. Comparable charges were not incurred in 2004.

Equity in income of unconsolidated real estate entities decreased from $7,790 in 2003 to $1,083 in 2004. This decrease was primarily due to the recognition of the Company’s share of a gain of $8,395 resulting from the sale of an apartment

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community by one of the limited liability companies in 2003. Excluding the impact of this gain, the net income of the unconsolidated entities improved in 2004 primarily due to the completion of the lease-up of one community held by the entities and the generally improving apartment market fundamentals resulting in improved operating performance of the communities held by the entities.

Recurring and nonrecurring capital expenditures from continuing operations increased $1,358 or 14.0% from 2003 to 2004. The increase in recurring capital expenditures of $1,929 or 35.2% reflects the impact of several communities beginning to capitalize carpet, vinyl and blinds in 2004 (the communities expensed these expenditures under the Company’s accounting policies for the initial five years), more leasing office upgrades in 2004, more parking lot resurfacings in 2004 as well as the timing of capital spending between years. The decrease in nonrecurring capital expenditures of $571 or 13.5% in 2004 reflects primarily lower expenditures on projects to prevent water infiltration on two communities in Florida.

Fully Stabilized (Same Store) Communities

The Company defines fully stabilized communities as those which have reached stabilization prior to the beginning of the previous year. For the 2004 to 2003 comparison, fully stabilized communities are defined as those communities which reached stabilization prior to January 1, 2003. This portfolio consisted of 46 communities with 17,584 units, including 22 communities with 8,846 units (50.3%) located in Atlanta, Georgia, 13 communities with 3,939 units (22.4%) located in Dallas, Texas, two communities with 1,305 units (7.5%) located in Tampa, Florida, three communities with 1,204 units (6.8%) located in Washington D.C. and six communities with 2,290 units (13.0%) located in other markets. The operating performance of these communities is summarized as follows:


	Year ended December 31,
	2004			2003			% Change
Rental and other revenues	$	217,702		$	215,581			1.0	%
Property operating and maintenance expenses (excluding depreciation and amortization)		84,537			81,250			4.0	%

Same store net operating income (1)	$	133,165		$	134,331			(0.9	)%

Capital expenditures (2)
Recurring
Carpet	$	2,273		$	1,597			42.3	%
Other		4,650			3,682			26.3	%

Total recurring		6,923			5,279			31.1	%
Non-recurring		2,959			3,271			(9.5	)%

Total capital expenditures(A)	$	9,882		$	8,550			15.6	%

Total capital expenditures per unit(A÷ 17,584 units)	$	562		$	486			15.6	%

Average monthly rental per apartment unit (3)	$	1,024		$	1,047			(2.2	)%

Average economic occupancy (4)		93.6	%		91.9	%		1.7	%


(1)		Net operating income of stabilized communities is a supplemental non-GAAP financial measure. See page 34 for a reconciliation of net operating income for stabilized communities to GAAP net income.

(2)		A reconciliation of these segment components of property capital expenditures to total recurring and non-recurring capital expenditures as presented in the consolidated statements of cash flows prepared under GAAP is detailed below.


	Year ended December 31,
	2004		2003
Recurring capital expenditures by operating segment
Fully stabilized	$	6,923	$	5,279
Communities stabilized in prior year		275		74
Construction and lease-up		25		—
Acquired communities		166		—
Other property segments, including discontinued operations		2,495		4,120

Total recurring capital expenditures per statements of cash flows	$	9,884	$	9,473


Non-recurring capital expenditures by operating segment
Fully stabilized	$	2,959	$	3,271
Communities stabilized in prior year		231		335
Construction and lease-up		—		—
Acquired communities		5		—
Other property segments, including discontinued operations		1,410		1,546

Total non-recurring capital expenditures, per statements of cash flows	$	4,605	$	5,152


		The Company uses same store recurring and non-recurring capital expenditures as cash flow measures. Same store recurring and non-recurring capital expenditures are supplemental non-GAAP financial measures. The Company believes that same store recurring and non-recurring capital expenditures are important indicators of the costs incurred by the Company in maintaining same store communities. The corresponding GAAP measures include information with respect to the Company’s other operating segments consisting of communities stabilized in the prior year, lease-up communities, acquired communities and sold communities in addition to same store information. Therefore, the Company believes that the Company’s presentation of same store recurring and non-recurring capital expenditures is necessary to demonstrate same store replacement costs over time. The Company believes that the most directly comparable GAAP measure to same store recurring and non-recurring capital

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		expenditures are the lines on the Company’s consolidated statements of cash flows entitled “recurring capital expenditures” and “non-recurring capital expenditures.”

(3)		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, divided by total units.

(4)		Average economic occupancy is defined as gross potential rent less vacancy losses, model expenses and bad debt expenses divided by gross potential rent for the period, expressed as a percentage. Gross potential rent is defined as the sum of the gross actual rental rates for leased units and the anticipated rental rates for unoccupied units. The calculation of average economic occupancy does not include a deduction for net concessions and employee discounts. Average economic occupancy including these amounts would have been 93.2% and 90.7% for the years ended December 31, 2004 and 2003, respectively. For the years ended December 31, 2004 and 2003, net concessions were $564 and $2,287, respectively, and employee discounts were $394 and $459, respectively.

Rental and other revenues increased $2,121 or 1.0% from 2003 to 2004. This increase resulted from increased average economic occupancy levels in 2004 offset somewhat by a 2.2% decline in the average monthly rental rate per apartment unit. The increase in the average economic occupancy of the portfolio from 91.9% in 2003 to 93.6% in 2004 resulted in lower net rental concessions of $1,723 and lower vacancy losses of $4,375 in 2004. Other property revenues also increased $1,237. The decline in average rental rates resulted in a revenue decrease of approximately $4,982 between years. Overall, the improving performance of the operating portfolio reflected gradually improving market conditions throughout 2004 in most of the Company’s markets resulting generally from improved economic conditions.

Beginning in mid 2003 and through 2004, the Company focused its leasing strategy on retaining higher average occupancy levels as detailed above. The overall revenue impact of the increase in occupancy levels, offset by declining year over year percentage decreases in average monthly rental rates, has resulted in increased year over year total rental and other revenues between years (1.0% increase between periods). In periods prior to mid 2003, the Company’s leasing strategy focused more on maintaining average monthly rental rates than on retaining occupancy. The Company believed this strategy change was necessary to maximize its operating results under the market conditions existing in 2003 and 2004, to operate the Company’s communities more efficiently at higher occupancy levels and to be in a better position to increase rental rates as market conditions improved in 2004 and in future years.

Property operating and maintenance expenses (exclusive of depreciation and amortization) increased $3,287 or 4.0% from 2003 to 2004. Increased personnel expenses of $1,480 or 8.0%, increased property tax expenses of $1,153 or 4.1%, and increased utility expenses of $886 or 9.0% were offset by decreased insurance expenses of $298 or 6.7%. Personnel expenses increased due to annual salary increases, increased bonus expenses and increased health and benefit expenses in 2004. Property tax expense increased due primarily to rising property valuations in the Dallas, Texas market. Utility expenses increased primarily due to higher water and sewer rates in Atlanta, Georgia. Insurance expenses decreased due to lower insurance rates for the 2004 insurance renewal period.

Discontinued Operations

In accordance with SFAS No. 144, the operating results and gains and losses on sales of real estate assets designated as held for sale are included in discontinued operations in the consolidated statements of operations. Under SFAS No. 144, the operating results of assets designated as held for sale are included in discontinued operations in the consolidated statements of operations for all periods presented. Additionally, all gains and losses on the sale of these assets are included in discontinued operations.

For the year ended December 31, 2005, income from discontinued operations included the results of operations of one condominium conversion community classified as held for sale at December 31, 2005 and four apartment communities classified as held for sale in the nine months ended September 30, 2006 (one of which was also sold in 2006) as well as the operations of six communities sold in 2005 through their sale dates and one condominium conversion community through its sell-out date. For the years ended December 31, 2004 and 2003, income from discontinued operations included the results of operations of the one condominium conversion community classified as held for sale at December 31, 2005, four apartment communities classified as held for sale in the nine months ended September 30, 2006 (one of which was also sold in 2006), communities sold in 2005, one condominium conversion community through its sell out date and the results of operations of 12 communities designated as held for sale and sold in 2004 and 2003 through their sale dates.

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The revenues and expenses of these communities for the years ended December 31, 2005, 2004 and 2003 were as follows:


	Year ended December 31,
	2005		2004			2003
Revenues
Rental	$	27,967	$	56,411		$	83,352
Other		2,805		5,077			6,590

Total revenues		30,772		61,488			89,942

Expenses
Property operating and maintenance (exclusive of items shown separately below)		13,136		25,411			35,687
Depreciation		5,813		11,645			18,144
Interest		5,421		9,321			12,551
Asset impairment charges		—		2,233			17,462
Minority interest in consolidated property partnerships		14		(238	)		(419	)

Total expenses		24,384		48,372			83,425

Income from discontinued operations (before minority interest)		6,388		13,116			6,517
Minority interest		250		(372	)		(578	)

Income from discontinued operations	$	6,638	$	12,744		$	5,939

The decrease in revenues and expenses between years results from the Company’s continuing asset sales program and the impact of the continued reclassification of the operating results relating to the aggregate number of communities held for sale and sold during the periods presented. Likewise, the gains on sales of properties included in discontinued operations for each year fluctuate with the timing and amounts of such sales. A discussion of the gains on property sales for the years presented is included under the caption “Results of Operations”.

As discussed under “Liquidity and Capital Resources”, the Company expects to continue to sell real estate assets in future periods as part of its overall investment and disposition strategy. As such, the Company may continue to have additional assets classified as held for sale, however, the timing and amount of such asset sales and their impact on the aggregate revenues and expenses included in discontinued operations will vary from year to year.

In 2004, the Company recorded asset impairment charges totaling $2,233 to write-down the cost of two apartment communities, located in Dallas, Texas, to their estimated fair value when the assets were classified as held for sale or sold. In 2003, the Company recorded asset impairment charges totaling $17,462 to write-down apartment communities in Dallas, Texas and Phoenix, Arizona to their estimated fair value. Additionally, should the Company change its expectations regarding the holding period for certain assets or decide to classify certain assets as held for sale, this could cause the Company to recognize impairment losses in future periods if the carrying value of these assets is not deemed recoverable.

2003 Management Transition and Severance and Proxy Contest Charges

In 2002, the Company began a planned management succession process. A new chief executive officer was named and the roles of the chairman of the board of directors and the chief executive officer were separated into individual positions. In the first quarter of 2003, the Company’s former chairman and vice chairman of the board of directors changed their status from executive officers to non-executive board members and an independent board member was elected as chairman of the board. The Company’s new chairman of the board and the chief executive officer embarked on additional management changes, which included the departures of the Company’s executive vice president and chief financial officer and executive vice president of asset management, in the second quarter of 2003. These changes and executive departures in 2003 lead to the severance charges discussed in the following paragraphs.

Following a proxy contest initiated by the Company’s former chairman of the board, as discussed more fully below, the Company completed the transition to a new management team. A new chief investment officer was added in the second quarter of 2003 to lead the Company’s development, acquisition and asset disposition efforts and a new chief financial officer was added in the fourth quarter of 2003 to lead the financial disciplines of the Company.

In 2003, the Company recorded charges of $21,506 relating to the change in roles from executive to non-executive status of the Company’s former chairman and vice chairman of the board of directors and relating to the departures of its executive vice president and chief financial officer and its executive vice president of asset management. These charges consisted of the discounted present value of the estimated payments to be made to the former chairman and vice chairman under their existing employment arrangements, amounts representing the discounted present value of estimated net costs that may be incurred by the Company relating to its split-dollar life insurance obligations to the individuals under their employment

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contracts and amounts representing the aggregate amount of the estimated payments and benefits to be made to the other departing executive officers.

In 2004, the Company entered into a final settlement agreement with its former chairman of the board of directors. Under the terms of the agreement, the former chairman’s employment and non-competition agreements were terminated and the Company agreed to continue to provide the former chairman certain payments and benefits through May 2013, the approximate expiration date of the original employment agreement. Because the present value of the estimated payments under the settlement agreement approximated the Company’s remaining accrued charge under the former employment agreement, no additional charges were recorded as a result of the settlement.

In 2005, the Company recorded an additional expense charge of $796 relating to changes in the estimated future costs of certain benefits granted to former executive officers under prior employment or settlement agreements. The estimated future cost increases primarily related to increased fuel and other operating costs and expenses associated with certain fractional aircraft benefits provided to such executives.

A summary of the changes in the accrued severance balance for years ended December 31, 2005, 2004 and 2003 is included in note 7 to the consolidated financial statements. Substantially all of these remaining severance amounts will be paid over the remaining terms of the former executives’ employment and settlement agreements (8 to 11 years).

Proxy and related costs of $5,231 represent the legal, advisory and other expenses associated with the solicitation of proxies from shareholders resulting from the proxy contest initiated in 2003 by the Company’s former chairman of the board of directors. Additionally, the $5,231 amount includes the estimated legal and resolution costs associated with the settlement of two derivative and purported class action lawsuits filed against the Company during the proxy contest. These lawsuits were settled in 2004. Substantially all of the proxy and related costs were paid in 2003.

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 flow from operating activities increased from $79,105 in 2004 to $86,761 in 2005 primarily due to higher net income (before depreciation and gains on sales) resulting primarily from the lack of large expenses in 2005 related to early debt extinguishment costs and terminations of a debt remarketing agreement (an aggregate reduction from 2004 of $13,496) and to a lesser extent the improved operating performance of the Company (as discussed above). The Company’s net cash provided by operating activities decreased from $91,549 in 2003 to $79,105 in 2004 primarily due to lower net income (before depreciation and gains on property sales) resulting from early debt extinguishment costs, costs (additional interest) associated with the termination of a debt remarketing agreement, increased general and administrative expenses (as discussed above) and reduced earnings from the dilutive impact of the Company’s asset sale and capital recycling program.

Net cash flow provided by investing activities decreased from $131,873 in 2004 to $70,293 in 2005 primarily due to the repayment in 2004 of construction loan advances from unconsolidated entities. In 2005, the Company acquired additional land for future development, acquired one apartment community and continued the construction of one community in Washington, D.C., however, the increased use of proceeds was generally offset by increased proceeds from community and condominium conversion sales. Net cash provided by investing activities decreased from $234,195 in 2003 to $131,873 in 2004 primarily due to the net repayment of construction loan advances and cash distributions from unconsolidated entities in 2003 offset somewhat by the timing and amount of assets sales and acquisitions between years.

Net cash flow used in financing activities decreased from $212,189 in 2004 to $150,767 in 2005 primarily due to having less proceeds from investing activities to retire debt in 2005. Net cash used in financing activities decreased from $330,800 in 2003 to $212,189 in 2004 primarily due to having less net proceeds from investing activities to retire outstanding debt and preferred equity in 2004.

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”). Management currently intends to continue operating the Company as a REIT in 2006. As a REIT, the Company is subject to a number of organizational and operating requirements, including a requirement to distribute 90% of its adjusted taxable income to its shareholders. As a REIT, the Company generally will not be subject to federal income taxes on its taxable income it distributes to its shareholders.

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Generally, the Company’s objective is to meet its short-term liquidity requirement of funding the payment of its current level of quarterly preferred and common stock dividends to shareholders through its net cash flows provided by operating activities, less its annual recurring and nonrecurring property and corporate capital expenditures. These operating capital expenditures are the capital expenditures necessary to maintain the earnings capacity of the Company’s operating assets over time.

For the year ended December 31, 2005, the Company’s net cash flow from operations, reduced by annual operating capital expenditures, was not sufficient to fully fund the Company’s current level of dividend payments to common and preferred shareholders by approximately $14,000. The Company used a combination of proceeds from asset sales and line of credit borrowings to fund the additional cash flow necessary to fully fund the Company’s annual dividend to common shareholders of $1.80 per share. The Company’s net cash flow from operations continues to be sufficient to meet the dividend requirements necessary to maintain its REIT status under the Code.

For 2006, management of the Company expects to maintain its current quarterly dividend payment rate to common shareholders of $0.45 per share. At this dividend rate, the Company expects that net cash flows from operations reduced by annual operating capital expenditures will not be sufficient to fund the dividend payments to common and preferred shareholders by approximately $10,000 to $15,000. The downward trend in the cash flow shortfall is primarily due to the anticipated improvement in the operating performance of the Company’s stabilized operating communities in 2006. The Company intends to use primarily the proceeds from 2006 apartment community and condominium sales to fund the additional cash flow necessary to fully fund the dividend payments to common shareholders. The primary factor leading to the shortfall is the negative cash flow impact of sales of operating properties (discussed below) and condominium conversion properties prior to the reinvestment of such proceeds. The Company’s board of directors, however, will continue to review the dividend quarterly.

The Company generally expects to utilize net cash flow from operations, available cash and cash equivalents and available capacity under its revolving lines of credit to fund its short-term liquidity requirements, including capital expenditures, development and construction expenditures, land and apartment community acquisitions, dividends and distributions on its common and preferred equity and its debt service requirements. Available borrowing capacity under the Company’s revolving lines of credit as of December 31, 2005 was created primarily through the Company’s asset sales program. The Company generally expects to fund its long-term liquidity requirements, including maturities of long-term debt and acquisition and development activities, through long-term unsecured and secured borrowings, through additional sales of selected operating and condominium conversion properties, and possibly through equity or leveraged joint venture arrangements. The Company may also continue to use joint venture arrangements in future periods to reduce its market concentrations in certain markets, build critical mass in other markets and to reduce its exposure to certain risks of its future development activities.

As previously discussed, the Company intends to use the proceeds from the sale of operating and condominium conversion properties, availability under its unsecured revolving lines of credit, debt financing and joint venture arrangements as the primary source of capital to fund its current and future development and acquisition expenditures. The Company had instituted an active asset sale and capital recycling program as the primary means to fund its on-going community development and acquisition program. Total net sales proceeds in 2005, 2004 and 2003 were $229,249 (including $81,560 of debt assumed), $242,962 (including $104,325 of debt assumed) and $163,560, respectively. Additionally in 2003, the Company received net proceeds of approximately $75,000 (including the repayment of the construction loan from the venture) from the sale of one apartment community held in an unconsolidated entity. A more detailed discussion of the assets sales is included in note 5 to the consolidated financial statements.

In 2005, the Company sold six apartment communities, containing 3,047 units, as part of its asset sales program designed to maintain the low average age and high quality of the portfolio and reduce the Company’s market concentrations in Atlanta, Georgia and Dallas, Texas. These sales generated significant capital gains for tax purposes in 2005. The Company was able to use its regular quarterly dividend of $0.45 per share (including a portion of its 2006 dividends) to distribute these capital gains to shareholders. The Company plans to sell one apartment community in 2006 and the sale is expected to generate net proceeds in excess of $100,000. The Company also expects to generate additional sales proceeds from the sale of converted condominium units. It is the current intent of management to continue to recycle capital through selling assets and reinvesting the proceeds as a strategy to diversify the cash flows of the Company across its markets and focus on building critical mass in fewer markets.

In 2005, the Company used a portion of the proceeds from its asset sales program and the proceeds of a new $100,000 unsecured note issuance to retire approximately $212,000 of maturing unsecured notes. In 2006, the Company has approximately $121,000 of unsecured and secured debt that matures or becomes prepayable. The Company anticipates

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refinancing some or all of this debt through new debt issuances, depending on the amount and timing of the Company’s capital needs and general credit market conditions.

At December 31, 2005, the Company had available credit facility borrowing capacity of approximately $265,000 under its line of credit facilities. The terms, conditions and restrictive covenants associated with the Company’s lines of credit facilities are summarized in note 3 to the consolidated financial statements.

Contractual Obligations

A summary of the Company’s future contractual obligations related to long-term debt, non-cancelable operating leases and other obligations at December 31, 2005, were as follows:


	Obligation Due Date
Contractual Obligations	Total		1 Year or Less		2-3 Years		4-5 Years		After 5 Years
Long-term debt (1)	$	879,236	$	81,269	$	162,750	$	264,168	$	371,049
Lines of credit (2)		101,379		—		101,379		—		—
Operating leases (3)		176,047		1,665		3,263		3,262		167,857
Other long-term obligations (4)		22,053		4,695		6,542		5,324		5,492
Development and construction obligations (5)		52,227		47,004		5,223		—		—

	$	1,230,942	$	134,633	$	279,157	$	272,754	$	544,398


(1)		Amounts include principal payments only. The Company made interest payments of $66,234, $66,992 and $78,822 for the years ended December 31, 2005, 2004 and 2003, respectively. The Company will pay interest in future periods on outstanding indebtedness based on the rates and terms summarized in note 3 to the consolidated financial statements.

(2)		At December 31, 2005, the Company had issued letters of credit to third parties totaling $3,136 under its credit facility arrangements.

(3)		Primarily includes ground leases underlying apartment communities owned by the Company.

(4)		Represents amounts committed to current and former executive officers under the terms of employment and settlement agreements.

(5)		Represents estimated remaining amounts necessary to complete one project currently under development, including amounts due under general construction contracts.

In addition to these contractual obligations, the Company incurs annual capital expenditures to maintain and enhance its existing portfolio of operating properties. Aggregate capital expenditures for the Company’s operating properties totaled $14,429, $14,515 and $15,865 for the years ended December 31, 2005, 2004 and 2003, respectively.

At December 31, 2005, the Company had an outstanding interest rate swap derivative financial instrument with a notional value of approximately $97,100 with a maturity date in 2009. The contractual payment terms of this arrangement is summarized in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Form 10-K for the year ended December 31, 2005, as amended. Additional information regarding the accounting and disclosure of this arrangement is included in note 13 to the Company’s consolidated financial statements.

Off-Balance Sheet Arrangements

The Company holds investments in three unconsolidated entities, in which it has a 35% ownership interest. Two of these unconsolidated entities have third-party mortgage indebtedness and the aggregate indebtedness totaled $66,999 at December 31, 2005.

Long-term Debt Issuances and Retirements

A summary of the Company’s outstanding debt and debt maturities at December 31, 2005 is included in note 3 to the consolidated financial statements. A summary of changes in secured and unsecured debt in 2005 is discussed below.

Upon their maturity in 2005, the Company repaid its $25,000 (7.28%) medium term, unsecured notes, repaid its $100,000 (6.85%) Mandatory Par Put Remarketed Securities (“MOPPRS”) debt arrangement, repaid its $62,043 (8.125%) medium term, unsecured notes and repaid its $25,000 (6.78%) medium term, unsecured notes from available borrowings under its unsecured lines of credit.

In 2005, the Company issued $100,000 of senior unsecured notes. The notes bear interest at 5.45% and mature in 2012. The net proceeds from the unsecured notes were used to reduce amounts outstanding under the Company’s unsecured lines of credit.

Post Properties, Inc.
Post Apartment Homes, L.P.

In 2005, the Company sold three apartment communities subject to the assumption of $81,560 of tax-exempt mortgage indebtedness (see note 4). As a result of these debt assumptions, the Company recorded losses on the early extinguishment of debt of $3,220 ($3,043 net of minority interest) related to the write-off of deferred loan costs of $2,265 ($2,141 net of minority interest) relating to such assumed indebtedness and the realization of a $955 ($902 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.

Stock Repurchase Program

In 2004, the Company’s board of directors adopted a new stock repurchase program under which the Company may repurchase up to $200,000 of common or preferred stock at market prices from time to time until December 31, 2006.

In 2005, the Company repurchased approximately 1,031 shares of its common stock totaling approximately $34,400 under 10b5-1 stock purchase plans, at an average price of $33.38 per share. Under its previous stock program which expired on December 31, 2004, the Company repurchased $2,268 of common stock and $120,000 or preferred stock and units during 2004.

Capitalization of Fixed Assets and Community Improvements

The Company has a policy of capitalizing those expenditures relating to the acquisition of new assets and the development and construction of new apartment communities. In addition, the Company capitalizes expenditures that enhance 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 of these assets) after construction completion. Thereafter, these replacements are capitalized. Further, the Company expenses as incurred interior and exterior painting of operating communities.

The Company capitalizes interest, real estate taxes, and certain internal personnel and associated costs 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 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 included in 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 practice 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.

Post Properties, Inc.
Post Apartment Homes, L.P.

Acquisition of assets and community improvement and other capitalized expenditures for the years ended December 31, 2005, 2004 and 2003 are summarized as follows:


	Year ended December 31,
	2005		2004		2003
Land and community development and acquisition activity (1)	$	116,710	$	43,708	$	24,914
Revenue generating additions and improvements (2)		—		26		1,240
Nonrecurring capital expenditures (3)		4,508		4,605		5,152
Recurring capital expenditures (4)
Carpet replacements, other community additions and improvements		9,921		9,884		9,473
Corporate additions and improvements		1,771		681		799

	$	132,910	$	58,904	$	41,578

Other Data
Capitalized interest	$	2,907	$	1,078	$	3,555

Capitalized development personnel and associated costs and fees (5)	$	1,219	$	998	$	1,566


(1)		Reflects aggregate land and community development and acquisition costs, exclusive of the change in construction payables between years.

(2)		Represents expenditures for major renovations of communities, water sub-metering equipment and other upgrade costs that enhance the rental value of such units.

(3)		Represents property improvement expenditures that generally occur less frequently than on an annual basis.

(4)		Represents property improvement expenditures of a type that are expected to be incurred on an annual basis.

(5)		Reflects development personnel and associated costs capitalized to construction and development activities.

Current Development Activity

At December 31, 2005, the Company had one community under development containing 350 apartment and for-sale condominium units. This community is summarized in the table below.

Costs

Estimated

Incurred

Quarter of

Number of

Construction

as of

Construction

First Units

Stabilized

Metropolitan Area

Units

Cost

12/31/2005

Start

Available

Occupancy (1)

($ in millions)

Construction/Lease-up Communities

Washington D.C.

Post Carlyle^TM - Apartments and Condominiums (2)

350

4Q ‘04

3Q ‘06

3Q ‘07

Construction/Lease-up Communities

350


(1)		The Company defines stabilized occupancy as the earlier to occur of (i) the attainment of 95% physical occupancy on the first day of any month or (ii) one year after completion of construction.

(2)		The condominium component of the project, consisting of 145 units, is being developed through a taxable REIT subsidiary in a majority owned joint venture with a Washington D.C. based developer. As of February 28, 2006, the Company has 81 units under contract for sale upon completion and delivery of the units. There can be no assurance that condominium units under contract will close.

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 generally 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 generally permits the earlier termination of a lease by a lessee upon thirty (30) days written notice to the Company and the payment of an amount equal to two month’s 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.

Post Properties, Inc.
Post Apartment Homes, L.P.

Funds from Operations

The Company uses the National Association of Real Estate Investment Trusts (“NAREIT”) definition of funds from operations (“FFO”). FFO is defined by NAREIT as net income available to common shareholders determined in accordance with GAAP, excluding gains (or losses) from extraordinary items and sales of depreciable 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 is a supplemental non-GAAP financial measure. 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.

The Company also uses FFO as an operating measure. Accounting for real estate assets using historical cost accounting under GAAP assumes that the value of real estate assets diminishes predictably over time. NAREIT stated in its April 2002 White Paper on Funds from Operations “since real estate asset values have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves.” As a result, the concept of FFO was created by NAREIT for the REIT industry to provide an alternate measure. Since the Company agrees with the concept of FFO and appreciates the reasons surrounding its creation, management believes that FFO is an important supplemental measure of operating performance. In addition, since most equity REITs provide FFO information to the investment community, the Company believes FFO is a useful supplemental measure for comparing the Company’s results to those of other equity REITs. The Company believes that the line on the Company’s consolidated statement of operations entitled “net income available to common shareholders” is the most directly comparable GAAP measure to FFO.

FFO should not be considered as an alternative to net income available to common shareholders (determined in accordance with GAAP) as an indicator of the Company’s financial performance. While management believes that FFO is an important supplemental non-GAAP financial measure, management believes it is also important to stress that FFO should not be considered as an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company’s liquidity. Further, FFO is not necessarily indicative of sufficient cash flow to fund all of the Company’s needs or ability to service indebtedness or make distributions.

Post Properties, Inc.
Post Apartment Homes, L.P.

A reconciliation of net income available to common shareholders to FFO available to common shareholders and unitholders is provided below.


	Year ended December 31,
	2005			2004			2003
Net income available to common shareholders	$	134,311		$	76,368		$	2,707
Minority interest of common unitholders — continuing operations		(120	)		(2,615	)		(4,532	)
Minority interest in discontinued operations (1)		7,219			7,793			4,873
Depreciation on wholly-owned real estate assets, net (2)		73,189			81,433			84,530
Depreciation on real estate assets held in unconsolidated entities		969			1,328			1,567
Gains on sales of real estate assets, net of provision for income taxes — discontinued operations		(140,643	)		(113,739	)		(40,792	)
Incremental gains on condominium sales, net of provision for income taxes (3)		8,811			—			—
Gains on sales of real estate assets — unconsolidated entities		(612	)		—			(8,395	)
Incremental gains on condominium sales — unconsolidated entities (3)		359			—			—

Funds from operations available to common shareholders and unitholders (4)	$	83,483		$	50,568		$	39,958

Cash flow provided by (used in):
Operating activities	$	86,761		$	79,105		$	91,549
Investing activities	$	70,293		$	131,873		$	234,195
Financing activities	$	(150,767	)	$	(212,189	)	$	(330,800	)

Weighted average shares outstanding — basic		40,217			39,777			37,688
Weighted average shares and units outstanding — basic		42,353			42,474			42,134
Weighted average shares outstanding — diluted (5)		40,616			39,892			37,699
Weighted average shares and units outstanding — diluted (5)		42,752			42,589			42,145


(1)		Represents the minority interest in earnings and gains (losses) on properties held for sale and sold reported as discontinued operations for the periods presented.

(2)		Depreciation on wholly-owned real estate assets is net of the minority interest portion of depreciation in consolidated entities.

(3)		The Company recognizes incremental gains on condominium sales in FFO, net of provision for income taxes, to the extent that net sales proceeds from the sale of condominium units exceeds the greater of their fair value or net book value as of the date the property is acquired by its taxable REIT subsidiary.

(4)		Funds from operations for the year ended December 31, 2005 included a loss of $3,220 from the early extinguishment of debt associated with asset sales, a severance charge of $796 and a gain of $5,267 on the sale of a technology investment. Funds from operations for the year ended December 31, 2004 included impairment charges of $2,333, losses on debt extinguishments of $8,139 and a loss on the termination of a debt remarketing agreement of $10,615. Additionally, FFO for the year ended December 31, 2004 includes a reduction for preferred stock and unit redemption costs of $3,526. FFO for the year ended December 31, 2003, included severance changes of $21,506, proxy and related costs of $5,231 and asset impairment charges of $17,462.

(5)		Diluted weighted average shares and units for the years ended December 31, 2005, 2004 and 2003 include 400, 115 and 11 of common stock equivalent shares and units, respectively, that were antidilutive to all income (loss) per share computations under generally accepted accounting principles.

Post Properties, Inc.
Post Apartment Homes, L.P.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements are listed under Item 15(a) and are filed as part of this report on the pages indicated. The supplementary data are included in note 18 of the Notes to Consolidated Financial Statements.

Post Properties, Inc.
Post Apartment Homes, L.P.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES

(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.

INDEX TO FINANCIAL STATEMENTS


		Page
POST PROPERTIES, INC.
Consolidated Financial Statements:
Management’s Report on Internal Control over Financial Reporting		49
Report of Independent Registered Public Accounting Firm		50
Consolidated Balance Sheets as of December 31, 2005 and 2004		51
Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003		52
Consolidated Statements of Shareholders’ Equity and Accumulated Earnings for the Years Ended December 31, 2005, 2004 and 2003		53
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003		55
Notes to the Consolidated Financial Statements		56

POST APARTMENT HOMES, L.P.
Consolidated Financial Statements:
Management’s Report on Internal Control over Financial Reporting		81
Report of Independent Registered Public Accounting Firm		82
Consolidated Balance Sheets as of December 31, 2005 and 2004		83
Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003		84
Consolidated Statements of Partners’ Equity for the Years Ended December 31, 2005, 2004 and 2003		85
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003		86
Notes to the Consolidated Financial Statements		87

All other schedules are omitted because they are either not applicable or not required.

Post Properties, Inc.

Post Properties, Inc.

Consolidated Financial Statements

December 31, 2005 and 2004

Post Properties, Inc.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Post Properties, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of the management of Post Properties, Inc., including the Company’s principal executive officer and principal financial officer, Company management conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2005 based on the framework inInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its evaluation under the framework inInternal Control – Integrated Framework, the management of Post Properties, Inc. concluded that its internal control over financial reporting was effective as of December 31, 2005. Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Post Properties, Inc.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Post Properties, Inc.:

We have completed integrated audits of Post Properties, Inc. 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005, and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the Post Properties, Inc. index appearing under Item 15(a) present fairly, in all material respects, the financial position of Post Properties, Inc. and subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements 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.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 15(a), that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP
Atlanta, Georgia
March 15, 2006, except with respect to our opinion on the consolidated financial statements insofar as it relates to the effects of discontinued operations discussed in Note 19, as to which date is December 8, 2006

Post Properties, Inc.

POST PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)


	December 31,			December 31,
	2005			2004
Assets
Real estate assets
Land	$	266,914		$	266,520
Building and improvements		1,789,479			1,887,514
Furniture, fixtures and equipment		207,497			214,954
Construction in progress		47,005			19,527
Land held for future development		62,511			18,910

		2,373,406			2,407,425
Less: accumulated depreciation		(516,954	)		(498,367	)
For-sale condominiums		38,338			—
Assets held for sale, net of accumulated depreciation of $0 and $26,332 at December 31, 2005 and 2004, respectively		4,591			68,661

Total real estate assets		1,899,381			1,977,719
Investments in and advances to unconsolidated real estate entities		26,614			21,320
Cash and cash equivalents		6,410			123
Restricted cash		4,599			1,844
Deferred charges, net		11,624			15,574
Other assets		32,826			37,262

Total assets	$	1,981,454		$	2,053,842

Liabilities and shareholders’ equity
Notes payable, including $0 and $34,060 of debt secured by assets held for sale at December 31, 2005 and 2004, respectively	$	980,615		$	1,129,478
Accounts payable and accrued expenses		58,474			58,837
Dividend and distribution payable		19,257			19,203
Accrued interest payable		5,478			7,677
Deposits and prepaid rents		9,857			7,236

Total liabilities		1,073,681			1,222,431


Minority interest of common unitholders in Operating Partnership		26,764			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:
41,394 and 40,164 shares issued, 41,394 and 40,164 shares outstanding at December 31, 2005 and 2004, respectively		414			401
Additional paid-in capital		803,765			775,221
Accumulated earnings		86,315			25,075
Accumulated other comprehensive income (loss)		(4,208	)		(8,668	)
Deferred compensation		(3,625	)		(3,988	)

		882,690			788,070
Less common stock in treasury, at cost, 44 and 0 shares at December 31, 2005 and 2004, respectively		(1,681	)		—

Total shareholders’ equity		881,009			788,070

Total liabilities and shareholders’ equity	$	1,981,454		$	2,053,842

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

Post Properties, Inc.

POST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)


	Year ended December 31,
	2005			2004			2003
Revenues
Rental	$	264,763		$	251,661		$	238,323
Other property revenues		15,478			14,131			13,077
Other		255			1,000			457

Total revenues		280,496			266,792			251,857

Expenses
Property operating and maintenance (exclusive of items shown separately below)		128,115			121,420			112,123
Depreciation		70,435			73,665			71,832
General and administrative		18,307			18,205			13,841
Investment, development and other		5,242			2,930			2,715
Proxy contest and related costs		—			—			5,231
Severance charges		796			—			21,506

Total expenses		222,895			216,220			227,248


Operating income		57,601			50,572			24,609

Interest income		661			817			894
Interest expense		(55,638	)		(59,763	)		(58,309	)
Amortization of deferred financing costs		(4,661	)		(4,304	)		(3,801	)
Equity in income of unconsolidated real estate entities		1,767			1,083			7,790
Gains on sale of technology investment		5,267			—			—
Termination of debt remarketing agreement (interest expense)		—			(10,615	)		—
Loss on early extinguishment of indebtedness		—			(4,011	)		—
Minority interest in consolidated property partnerships		239			671			1,605
Minority interest of preferred unitholders		—			(3,780	)		(5,600	)
Minority interest of common unitholders		120			2,615			4,532

Income (loss) from continuing operations		5,356			(26,715	)		(28,280	)

Discontinued operations
Income from discontinued operations, net of minority interest		6,638			12,744			5,939
Gains on sales of real estate assets, net of minority interest and provision for income taxes		132,997			106,039			36,497
Loss on early extinguishment of indebtedness associated with property sales, net of minority interest		(3,043	)		(3,849	)		—

Income from discontinued operations		136,592			114,934			42,436

Net income		141,948			88,219			14,156
Dividends to preferred shareholders		(7,637	)		(8,325	)		(11,449	)
Redemption costs on preferred stock and units		—			(3,526	)		—

Net income available to common shareholders	$	134,311		$	76,368		$	2,707


Per common share data — Basic
Loss from continuing operations (net of preferred dividends and redemption costs)	$	(0.06	)	$	(0.97	)	$	(1.05	)
Income from discontinued operations		3.40			2.89			1.13

Net income available to common shareholders	$	3.34		$	1.92		$	0.07

Weighted average common shares outstanding – basic		40,217			39,777			37,688

Per common share data — Diluted
Loss from continuing operations (net of preferred dividends and redemption costs)	$	(0.06	)	$	(0.97	)	$	(1.05	)
Income from discontinued operations		3.40			2.89			1.13

Net income available to common shareholders	$	3.34		$	1.92		$	0.07

Weighted average common shares outstanding – diluted		40,217			39,777			37,688

Common dividends declared	$	1.80		$	1.80		$	1.80

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

Post Properties, Inc.

POST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND
ACCUMULATED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(In thousands, except per share data)


																		Accumulated
												Additional						Other
	Preferred			Common			Preferred			Common		Paid-in			Accumulated			Comprehensive			Deferred			Treasury
	Shares			Shares			Stock			Stock		Capital			Earnings			Income (Loss)			Compensation			Stock			Total
Shareholders’ Equity and Accumulated Earnings, December 31, 2002		4,900			37,202		$	49		$	396	$	940,122		$	—		$	(14,822	)	$	(639	)	$	(91,407	)	$	833,699
Comprehensive income
Net income		—			—			—			—		—			14,156			—			—			—			14,156
Net change in derivative value, net of minority interest		—			—			—			—		—			—			2,460			—			—			2,460

Total comprehensive income																												16,616
Proceeds from employee stock purchase and stock option plans		—			148			—			—		(1,341	)		—			—			—			5,480			4,139
Adjustment for minority interest of unitholders in Operating Partnership upon conversion of units into common shares and at dates of capital transactions		—			1,162			—			—		(22,096	)		—			—			—			42,898			20,802
Stock-based compensation		—			—			—			—		218			—			—			—			—			218
Restricted stock issuances, net of forfeitures		—			174			—			—		(1,737	)		—			—			(4,527	)		6,264			—
Amortization of deferred compensation		—			—			—			—		—			—			—			742			—			742
Dividends to preferred shareholders		—			—			—			—		—			(11,449	)		—			—			—			(11,449	)
Dividends to common shareholders ($1.80 per share)		—			—			—			—		(65,534	)		(2,707	)		—			—			—			(68,241	)

Shareholders’ Equity and Accumulated Earnings, December 31, 2003		4,900			38,686			49			396		849,632			—			(12,362	)		(4,424	)		(36,765	)		796,526
Comprehensive income
Net income		—			—			—			—		—			88,219			—			—			—			88,219
Net change in derivative value, net of minority interest		—			—			—			—		—			—			3,694			—			—			3,694

Total comprehensive income		—			—			—			—		—			—			—			—			—			91,913
Proceeds from employee stock purchase and stock option plans		—			367			—			5		6,115			—			—			—			4,345			10,465
Adjustment for minority interest of unitholders in Operating Partnership upon conversion of units into common shares and at dates of capital transactions		—			1,168			—			—		(14,042	)		—			—			—			33,890			19,848
Redemption of preferred stock		(2,000	)		—			(20	)		—		(49,980	)		—			—			—			—			(50,000	)
Stock-based compensation		—			—			—			—		633			—			—			—			—			633
Restricted stock issuances, net of forfeitures		—			25			—			—		(125	)		—			—			(673	)		798			—
Amortization of deferred compensation		—			—			—			—		—			—			—			1,109			—			1,109
Treasury stock acquisitions		—			(82	)		—			—		—			—			—			—			(2,268	)		(2,268	)
Dividends to preferred shareholders		—			—			—			—		—			(8,325	)		—			—			—			(8,325	)
Dividends to common shareholders ($1.80 per share)		—			—			—			—		(17,012	)		(54,819	)		—			—			—			(71,831	)

Shareholders’ Equity and Accumulated Earnings, December 31, 2004		2,900			40,164			29			401	$	775,221		$	25,075		$	(8,668	)	$	(3,988	)	$	—		$	788,070

Post Properties, Inc.
Post Apartment Homes, L.P.

POST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND
ACCUMULATED EARNINGS (cont’d)
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(In thousands, except per share data)


															Accumulated
										Additional					Other
	Preferred		Common			Preferred		Common		Paid-in		Accumulated			Comprehensive			Deferred			Treasury
	Shares		Shares			Stock		Stock		Capital		Earnings			Income (Loss)			Compensation			Stock			Total
Shareholders’ Equity and Accumulated Earnings, December 31, 2004		2,900		40,164		$	29	$	401	$	775,221	$	25,075		$	(8,668	)	$	(3,988	)	$	—		$	788,070
Comprehensive income
Net income		—		—			—		—		—		141,948			—			—			—			141,948
Net change in derivative value, net of minority interest		—		—			—		—		—		—			5,559			—			—			5,559

Total comprehensive income																									147,507
Proceeds from employee stock purchase and stock option plans		—		1,138			—		8		16,181		—			—			—			21,652			37,841
Adjustment for minority interest of unitholders in Operating Partnership upon conversion of units into common shares and at dates of capital transactions		—		1,097			—		5		10,065		—			(1,099	)		—			11,473			20,444
Stock-based compensation		—		—			—		—		888		—			—			—			—			888
Restricted stock issuances, net of forfeitures		—		26			—		—		1,410		—			—			(1,004	)		(406	)		—
Amortization of deferred compensation		—		—			—		—		—		—			—			1,367			—			1,367
Treasury stock acquisitions		—		(1,031	)		—		—		—		—			—			—			(34,400	)		(34,400	)
Dividends to preferred shareholders		—		—			—		—		—		(7,637	)		—			—			—			(7,637	)
Dividends to common shareholders ($1.80 per share)		—		—			—		—		—		(73,071	)		—			—			—			(73,071	)

Shareholders’ Equity and Accumulated Earnings, December 31, 2005		2,900		41,394		$	29	$	414	$	803,765	$	86,315		$	(4,208	)	$	(3,625	)	$	(1,681	)	$	881,009

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

Post Properties, Inc.
Post Apartment Homes, L.P.

POST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per share data)


	Year ended December 31,
	2005			2004			2003
Cash Flows From Operating Activities
Net income	$	141,948		$	88,219		$	14,156
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		76,248			85,310			89,975
Amortization of deferred financing costs		4,661			4,304			3,801
Minority interest of preferred unitholders in Operating Partnership		—			3,780			5,600
Minority interest of common unitholders in Operating Partnership		(120	)		(2,615	)		(4,532	)
Minority interest in discontinued operations		7,219			7,793			4,873
Gains on sales of real estate assets — discontinued operations		(140,643	)		(113,739	)		(40,792	)
Gain on sale of technology investment		(5,267	)		—			—
Asset impairment charges		—			2,233			17,462
Equity in income of unconsolidated real estate entities		(1,634	)		(941	)		(7,790	)
Distributions of earnings of unconsolidated entities		2,033			1,928			—
Stock-based compensation		2,293			1,785			1,071
Deferred compensation		194			—			—
Loss on early extinguishment of indebtedness		2,264			4,302			—
Changes in assets, (increase) decrease in:
Restricted cash		(2,755	)		221			(696	)
Other assets		(1,257	)		(2,858	)		4,676
Deferred charges		(1,082	)		(361	)		(2,210	)
Changes in liabilities, increase (decrease) in:
Accrued interest payable		(2,199	)		754			(2,071	)
Accounts payable and accrued expenses		2,237			(356	)		8,386
Deposits and prepaid rents		2,621			(654	)		(360	)

Net cash provided by operating activities		86,761			79,105			91,549

Cash Flows From Investing Activities
Construction and acquisition of real estate assets, net of payables		(112,527	)		(42,777	)		(24,179	)
Net proceeds from sales of real estate assets		199,546			138,637			163,560
Proceeds from sale of technology investment		5,267			—			—
Capitalized interest		(2,907	)		(1,078	)		(3,555	)
Recurring capital expenditures		(9,921	)		(9,884	)		(9,473	)
Non-recurring capital expenditures		(4,508	)		(4,605	)		(5,152	)
Revenue generating capital expenditures		—			(26	)		(1,240	)
Corporate additions and improvements		(1,771	)		(681	)		(799	)
Distributions from (investments in and advances to) unconsolidated entities		(5,846	)		52,287			115,033
Notes receivable collections		2,960			—			—

Net cash provided by investing activities		70,293			131,873			234,195

Cash Flows From Financing Activities
Proceeds from indebtedness		100,000			135,000			—
Payments on indebtedness		(217,934	)		(115,753	)		(103,875	)
Payments of financing costs		(1,211	)		(5,631	)		—
Lines of credit proceeds (repayments), net		50,631			(21,262	)		(124,358	)
Redemption of preferred stock		—			(50,000	)		—
Redemption of preferred units		—			(70,000	)		—
Treasury stock acquisitions		(34,400	)		(2,268	)		—
Proceeds from employee stock purchase and stock option plans		36,084			10,465			4,139
Capital contributions (distributions) of minority interest		283			(3,806	)		—
Distributions to preferred unitholders		—			(4,246	)		(5,600	)
Distributions to common unitholders		(4,060	)		(5,219	)		(9,789	)
Dividends paid to preferred shareholders		(7,637	)		(8,325	)		(11,449	)
Dividends paid to common shareholders		(72,523	)		(71,144	)		(79,868	)

Net cash used in financing activities		(150,767	)		(212,189	)		(330,800	)

Net increase (decrease) in cash and cash equivalents		6,287			(1,211	)		(5,056	)
Cash and cash equivalents, beginning of period		123			1,334			6,390

Cash and cash equivalents, end of period	$	6,410		$	123		$	1,334

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

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICES

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 December 31, 2005, the Company owned 21,442 apartment units in 58 apartment communities, including 545 apartment units in two communities held in unconsolidated entities and 205 apartment units in one community currently under development. The Company is also developing 145 for-sale condominium homes and is converting 597 apartment units (including 121 units in one community held in an unconsolidated entity) into for-sale condominium homes through a taxable REIT subsidiary. At December 31, 2005, approximately 46.8%, 18.5%, 9.3% and 8.9% (on a unit basis) of the Company’s operating communities were located in the Atlanta, Dallas, the greater Washington D.C. and Tampa metropolitan areas, respectively.

At December 31, 2005, the Company had outstanding 41,394 shares of common stock and owned the same number of units of common limited partnership interests (“Common Units”) in the Operating Partnership, representing a 96.7% ownership interest in the Operating Partnership. Common Units held by persons other than the Company totaled 1,402 at December 31, 2005 and represented a 3.3% 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 95.0%, 93.7% and 89.5% for the years ended December 31, 2005, 2004 and 2003, respectively.

Basis of presentation

The accompanying consolidated financial statements include the consolidated accounts of the Company, the Operating Partnership and their wholly owned subsidiaries. The Company also consolidates other entities in which it has a controlling financial interest or entities where it is determined to be the primary beneficiary under Financial Accounting Standards Board Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest Entities.” Under FIN 46R, variable interest entities (“VIEs”) are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. The primary beneficiary is required to consolidate the VIE for financial reporting purposes. The application of FIN 46R requires management to make significant estimates and judgments about the Company’s and its other partners’ rights, obligations and economic interests in such entities. For entities in which the Company has less than a controlling financial interest or entities where it is not the primary beneficiary under FIN 46R, the entities 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 intercompany accounts and transactions have been eliminated in consolidation. The minority interest of unitholders in the operations of the Operating Partnership is calculated based on the weighted average unit ownership during the period.

In 2005, the Company reclassified certain expenses previously reported as general and administrative expenses to property operating and maintenance expenses and investment, development and other expenses on the accompanying statements of operations. Prior period amounts have been reclassified to conform to the 2005 presentation. The reclassified expenses primarily included certain investment group executive and administrative functions and long-term, stock-based compensation and benefits expenses associated with property management and investment and development group activities.

Certain other items in the 2004 and 2003 consolidated financial statements were reclassified for comparative purposes with the 2005 consolidated financial statements.

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

Cost capitalization

The Company capitalizes those expenditures relating to the acquisition of new assets, the development and construction of new apartment and condominium communities, the enhancement of the value of existing assets and those expenditures that substantially extend the life of existing assets. Recurring capital expenditures are expenditures of a type that are expected to be incurred on an annual basis during the life of an apartment community, such as carpet, appliances and flooring. Non-recurring capital expenditures are expenditures that generally occur less frequently than on an annual basis, such as major exterior projects relating to landscaping and structural improvements. Revenue generating capital expenditures are expenditures for the major renovation of communities, the new installation of water sub-metering equipment and other property upgrade costs that enhance the rental value of such communities. 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 their estimated depreciable life). Thereafter, these replacements are capitalized and depreciated. The Company expenses as incurred interior and exterior painting of its operating communities.

For communities under development, the Company capitalizes interest, real estate taxes, and certain internal personnel and associated costs directly related to apartment and condominium communities under development and construction. Interest is capitalized to projects under development based upon the weighted average cumulative project costs for each month multiplied by the Company’s weighted average borrowing costs, expressed as a percentage. Weighted average borrowing costs include the costs of the Company’s fixed rate secured and unsecured borrowings and the variable rate unsecured borrowings under its line of credit facilities. The weighted average borrowing costs, expressed as a percentage, for the years ended December 31, 2005, 2004 and 2003 were approximately 6.5%, 7.3% and 7.0%, respectively. Internal personnel and associated costs are capitalized to projects under development based upon the effort 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 completion of rental and condominium units, 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 or sale. This results in a proration of costs between amounts that are capitalized and expensed as the residential units in an apartment development community become available for occupancy. In addition, prior to the completion of rental units, the Company expenses as incurred substantially all operating expenses (including pre-opening marketing as well as property management and leasing personnel expenses) of such rental communities. Prior to the completion and closing of condominium units, the Company expenses all sales and marketing costs related to such units.

For cash flow statement purposes, the Company classifies capital expenditures for newly developed condominium communities and for condominium conversion communities in investing activities in the caption titled, “Construction and acquisition of real estate assets.” Likewise, the proceeds from the sales of such condominiums are included in investing activities in the caption titled, “Net proceeds from sales of real estate assets.”

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. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Factors considered by management in evaluating impairment of its existing real estate assets held for investment 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. Under SFAS No. 144, a real estate asset held for investment is not considered impaired if the undiscounted, estimated future cash flows of an asset (both the annual estimated cash flow from future operations and the estimated cash flow from the theoretical sale of the asset) over its estimated holding period are in excess of the asset’s net book value at the balance sheet date. 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 estimated fair value.

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

The Company periodically classifies real estate assets as held for sale. An asset is classified as held for sale after the approval of the Company’s investment committee and after an actual program to sell the asset has commenced. Upon the classification of a real estate asset as held for sale, the carrying value of the asset is reduced to the lower of its net book value or its estimated fair value, less costs to sell the asset. Subsequent to the classification of assets as held for sale, no further depreciation expense is recorded. Real estate assets held for sale are stated separately on the accompanying consolidated balance sheets. The operating results of real estate assets held for sale and sold are reported as discontinued operations in the accompanying statements of operations. Income from discontinued operations includes the revenues and expenses, including depreciation and allocated interest expense, associated with the assets. Interest expense is allocated to assets held for sale based on actual interest costs for assets with secured mortgage debt. Interest expense is allocated to unencumbered assets based on the ratio of unsecured debt to unencumbered assets multiplied by the weighted average interest rate on the Company’s unsecured debt for the period and further multiplied by the book value of the assets held for sale and sold. This classification of operating results as discontinued operations applies retroactively for all periods presented. Additionally, gains and losses on assets designated as held for sale are classified as part of discontinued operations.

For condominium conversion projects, a complete community conversion is treated as discontinued operations in the same manner as discussed above for apartment community sales. For partial conversions of communities, the operating results, condominium revenues and associated gains are reflected in continuing operations (see discussion under “revenue recognition” below) and the net book value of the assets being converted into condominiums are reflected separately from discontinued assets on the consolidated balance sheet in the caption titled, “For-sale condominiums.”

Revenue recognition

Residential properties are leased under operating leases with terms of generally one year or less. Rental revenues from residential leases are recognized on the straight-line method over the approximate life of the leases, which is generally one year. The recognition of rental revenues from residential leases when earned has historically not been materially different from rental revenues recognized on a straight-line basis.

Under the terms of residential leases, the residents of the Company’s residential communities are obligated to reimburse the Company for certain utility usage, water and electricity (at selected properties), where the Company is the primary obligor to the public utility entity. These utility reimbursements from residents are reflected as other property revenues in the consolidated statements of operations.

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, revenues from individual condominium unit sales are recognized upon the closing of the sale transactions (the “Completed Contract Method”), as all conditions for full profit recognition have been met at that time and the conversion construction periods are typically very short. Under SFAS No. 66, the Company uses the relative sales value method to allocate costs and recognize profits from condominium conversion sales. In accordance with SFAS No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets,” gains on sales of condominium units at complete community condominium conversion projects are included in discontinued operations. For condominium conversion projects relating to a portion of an existing apartment community, the Company will also recognize revenues and the associated gains under the Completed Contract Method, as discussed herein. Since a portion of an operating community does not meet the requirements of a component of an entity under SFAS No. 144, the revenues and gains on sales of condominium units sold at partial condominium communities will be included in continuing operations.

For newly developed condominiums, the Company accounts for each project under either the Completed Contract Method or the “Percentage of Completion Method,” based on a specific evaluation of the factors specified in SFAS No. 66. The factors used to determine the appropriate accounting method are the legal commitment of the purchaser in the real estate contract, whether the construction of the project is beyond a preliminary phase, sufficient units have been contracted to ensure the project will not revert to a rental project, the aggregate project sale proceeds and costs can be reasonably estimated and the buyer has made an adequate initial and continuing cash investment under the contract in accordance with SFAS No. 66. Under the Percentage of Completion Method, revenues and the associated gains are recognized over the project construction period generally based on the percentage of total project costs incurred to estimated total projects costs for each condominium unit under a binding real estate contract.

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

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.

Apartment community acquisitions

In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”, the aggregate purchase price of apartment community acquisitions is allocated to the tangible assets, intangible assets and liabilities (including mortgage indebtedness) acquired in each transaction, based on their estimated fair values at the acquisition date. The acquired tangible assets, principally land, building and improvements and furniture, fixtures and equipment, are reflected in real estate assets and such assets, excluding land, are depreciated over their estimated useful lives. The acquired intangible assets, principally above/below market leases, in-place leases and resident relationships, are reflected in other assets and amortized over the average remaining lease terms of the acquired leases and resident relationships (generally 6 months to 18 months).

Stock-based compensation

On January 1, 2003, the Company elected to voluntarily change its method of accounting for stock-based compensation to the fair value method prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” using the prospective method prescribed in SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” For stock-based compensation granted prior to January 1, 2003, the Company accounted for stock-based compensation under the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees.”

Under the prospective method of adoption prescribed by SFAS No. 123 and SFAS No. 148, the Company reflects as an expense each period the vested portion of the estimated cost of stock-based compensation, calculated under the Black-Scholes option pricing model for stock options, for all stock-based compensation granted after January 1, 2003. For stock-based compensation granted prior to December 31, 2002, compensation expense was not recognized for stock options granted at the Company’s current stock price on the grant date. As a result, the Company’s general and administrative expenses may not be comparable between periods.

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


	2005			2004			2003
Net income available to common shareholders
As reported	$	134,311		$	76,368		$	2,707
Stock-based compensation included in net income as reported, net of minority interest		2,184			1,672			958
Stock-based compensation determined under the fair value method, net of minority interest		(2,210	)		(1,735	)		(1,088	)

Pro forma	$	134,285		$	76,305		$	2,577


Net income per common share – basic
As reported	$	3.34		$	1.92		$	0.07
Pro forma	$	3.34		$	1.92		$	0.07

Net income per common share – diluted
As reported	$	3.34		$	1.92		$	0.07
Pro forma	$	3.34		$	1.92		$	0.07

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

Derivative financial instruments

The Company accounts for derivative financial instruments at fair value under the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended. The Company uses derivative financial instruments, interest rate swap and interest rate cap arrangements, to manage or hedge its exposure to interest rate changes. The Company designates each derivative instrument as a hedge of specific interest expense cash flow exposure. Under SFAS 133, as amended, derivative instruments qualifying as hedges of specific cash flows are recorded on the balance sheet at fair value with an offsetting increase or decrease to accumulated other comprehensive income, a shareholders’ equity account, until the hedged transactions are recognized in earnings. Periodically, the Company evaluates the effectiveness of its cash flow hedges. Any ineffective portion of cash flow hedges are recognized immediately in earnings.

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 is generally comprised of resident security deposits for apartment communities located in Florida and Tennessee, required maintenance reserves for certain communities located in Georgia and earnest money and escrow deposits associated with the Company’s for-sale condominium business.

Deferred financing costs

Deferred financing costs are amortized using the straight-line method, which approximates the interest method, over the terms of the related debt.

Per share data

The Company reports both basic and diluted earnings per share amounts. Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares and common share equivalents outstanding during the year, which are computed using the treasury stock method for outstanding stock options and non-vested awards. Common share equivalents are excluded from the computations in years in which they have an anti-dilutive effect.

Conversion of common units in the Operating Partnership

In accordance with the conclusions summarized in Emerging Issue Task Force, Issue No. 95-7, “Implementation Issues Related to the Treatment of Minority Interests in Certain Real Estate Investment Trusts”, the Company accounts for the conversion of original sponsors’ common units in the Operating Partnership into shares of company common stock at the net book value of the minority interest acquired. These transactions result in a reduction in the minority interest of common unit holders in the Operating Partnership and a corresponding increase in shareholders’ equity in the accompanying consolidated balance sheet at the date of conversion.

Use of estimates

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.

New accounting pronouncements

In 2005 and 2004, several new accounting pronouncements were issued and the pronouncements with a potential impact on the Company in 2005 and in future periods are discussed below.

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

SFAS No. 123R, “Share-Based Payment”, was issued in December 2004. SFAS No. 123R revised 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 superseded the provisions of APB No. 25. The provisions of SFAS No. 123R were effective on January 1, 2006. The Company adopted SFAS No. 123R on January 1, 2006 using the modified prospective method of adoption. Since the Company elected to apply the provisions of SFAS No. 123 on January 1, 2003, the adoption of SFAS No. 123R will not have a significant impact on the Company’s financial position or results of operations.

2. DEFERRED CHARGES

Deferred charges consist of the following:


	December 31,
	2005			2004
Deferred financing costs	$	26,050		$	33,542
Other		5,399			4,350

		31,449			37,892

Less: accumulated amortization		(19,825	)		(22,318	)

	$	11,624		$	15,574

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

3. INDEBTEDNESS

At December 31, 2005 and 2004, the Company’s indebtedness consisted of the following:


								December 31,
	Payment		Interest			Maturity
Description	Terms		Rate			Date		2005		2004
Unsecured Notes
Senior Notes	Int.			5.125% - 7.70	%		2006-2012	$	485,000	$	385,000
Medium Term Notes	Int.			—			—		—		212,043

									485,000		597,043

Unsecured Lines of Credit
Syndicated Line of Credit		N/A	LIBOR + 0.75		%(1)		2007		90,000		40,000
Cash Management Line		N/A	LIBOR + 0.75		%		2007		11,379		10,748

									101,379		50,748

Conventional Fixed Rate (Secured)
FNMA	Prin. and Int.			6.975	%(2)		2029		97,100		98,500
Other	Prin. and Int.			4.27% - 7.69	%		2007-2013		268,641		273,132

									365,741		371,632

Tax Exempt Floating Rate Bonds (Secured)	Int.			3.54	%(3)		2025		28,495		110,055

Total								$	980,615	$	1,129,478


(1)		Represents stated rate. At December 31, 2005, the weighted average interest rate was 4.75%.

(2)		Interest rate is fixed at 6.975%, inclusive of credit enhancement and other fees, to 2009 through an interest rate swap arrangement.

(3)		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 the rate at December 31, 2005 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%. At December 31, 2005 and 2004, approximately $0 and $34,060, respectively, of this debt was secured by assets held for sale. In June 2005, the Company executed an amendment to its master reimbursement agreement with FNMA, which agreement, among other things, sets forth the Company’s payment obligations under its variable-rate, tax-exempt bond indebtedness. The amendment deferred the commencement of principal repayments under the bonds by five years from the originally scheduled commencement date. The original maturity date for the bonds remains unchanged and the amortization schedule of the bonds was changed commensurate with the five-year deferral of the start of principal amortization.

Debt maturities

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


2006	$	81,269
2007		259,572	(1)
2008		4,557
2009		75,901
2010		188,267
Thereafter		371,049

	$	980,615


(1)		Includes outstanding balance on lines of credit totaling $101,379.

Debt issuances, retirements and modifications

2005

Upon their maturity in 2005, the Company repaid its $25,000 (7.28%) medium term, unsecured notes, repaid its $100,000 (6.85%) Mandatory Par Put Remarketed Securities (“MOPPRS”) debt arrangement, repaid its $62,043 (8.125%) medium term, unsecured notes and repaid its $25,000 (6.78%) medium term, unsecured notes, from available borrowings under its unsecured lines of credit.

The Company sold three apartment communities subject to the assumption of $81,560 of tax-exempt mortgage indebtedness (see note 5). As a result of these debt assumptions, the Company recorded losses on the early extinguishment of debt of $3,220 ($3,043 net of minority interest) related to the write-off of deferred loan costs of $2,264 ($2,141 net of minority interest) relating to such assumed indebtedness and the realization of a $955 ($902 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.

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

2004

In the fourth quarter of 2004, the Company issued $100,000 of senior unsecured notes. The notes bear interest at 5.125% and mature in 2011. The net proceeds from the unsecured notes were used to reduce amounts outstanding under the Company’s unsecured lines of credit. In 2004, the Company also closed a $35,000 secured, fixed rate mortgage note payable in a consolidated real estate entity. The note bears interest at 4.27%, requires monthly interest only payments through March 2007 and monthly principal and interest payments based on a 30-year amortization schedule from April 2007 through the note maturity date in March 2009.

In the fourth quarter of 2004, the Company purchased and retired $87,957 of the Company’s 8.125% medium term, unsecured notes through a tender offer using available borrowings under its unsecured lines of credit. Subsequent to the debt retirement, $62,043 of the 8.125% medium term notes remained outstanding until their maturity in 2005. As part of this transaction, the Company recorded a loss on the early extinguishment of this indebtedness of $4,011 representing the debt repurchase premiums, the expenses of the tender offer and the write-off of the unamortized deferred financing costs associated with the retired indebtedness.

In the fourth quarter of 2004, the Company terminated a remarketing agreement related to its $100,000, 6.85% Mandatory Par Put Remarketed Securities (“MOPPRS”). In connection with the termination of the remarketing agreement, the Company paid $10,615 (interest expense), including transaction expenses. Under the provisions of the remarketing agreement, the remarketing agent had the right to remarket the $100,000 unsecured notes in 2005 for a ten-year term at an interest rate calculated as 5.715% plus the Company’s then current credit spread to the ten-year treasury rate. As a result of the termination of the remarketing agreement, the underlying debt matured and was repaid in 2005.

Upon their maturity in 2004, the Company repaid its $13,000 (7.30%) medium term, unsecured notes and repaid its $10,000 (6.69%) medium term, unsecured notes, from available borrowings under its unsecured lines of credit.

The Company sold certain apartment communities subject to the assumption of $104,325 of tax-exempt mortgage indebtedness (see note 5). As a result of this debt assumption, the Company recorded a loss on early extinguishment of indebtedness of $4,128 ($3,849 net of minority interest) related to the write-off of unamortized deferred financing costs of $3,187 ($2,972 net of minority interest) relating to such assumed indebtedness and the realization of a $941 ($877 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.

In conjunction with an apartment community acquisition (see note 5) in 2004, the Company assumed a secured, fixed rate mortgage note payable. The mortgage note was valued at $49,496 yielding an effective rate of 4.7%. The mortgage note bears interest at a coupon rate of 6.8%, requires monthly principal and interest payments and matures in 2007.

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

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

the Company’s current dividend level. At December 31, 2005, the Company had issued letters of credit to third parties totaling $3,136 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.

Interest paid

Interest paid (including capitalized amounts of $2,907, $1,078 and $3,555 for the years ended December 31, 2005, 2004 and 2003, respectively), aggregated $66,234, $66,992 and $78,822 for the years ended December 31, 2005, 2004 and 2003, respectively.

Pledged assets

The aggregate net book value at December 31, 2005 of property pledged as collateral for indebtedness amounted to approximately $465,420.

4. INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ENTITIES

At December 31, 2005, the Company holds investments in three individual limited liability companies (the “Property LLCs”) with an institutional investor. Two of the Property LLCs own single apartment communities. The third Property LLC is converting its apartment community, containing 121 units, 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. Under FIN 46R, the Company concluded the Property LLCs were not VIEs and therefore, did not require consolidation. The excess of the Company’s investment over its equity in the underlying net assets of the Property LLCs was approximately $6,099 at December 31, 2005. The excess investment related to 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 approximately $611 at December 31, 2005 related to the Property LLC holding the condominium conversion community will be recognized as additional costs 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.

In June 2003, the underlying apartment community held by a fourth Property LLC was sold. The financial information below for the year ended December 31, 2003 reflects the gain on property sale of $26,179 and the operating results of this Property LLC as discontinued operations through the sale date. The Company’s share of this gain of $8,395 is included in the Company’s share of net income (loss) shown in the table below.

The operating results of the Company include its allocable 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:


	December 31,
Balance Sheet Data	2005		2004
Real estate assets, net of accumulated depreciation of $8,349 and $9,712, respectively	$	96,000	$	124,072
Assets held for sale, net		17,715		—
Cash and other		1,770		2,797

Total assets	$	115,485	$	126,869

Mortgage notes payable	$	66,999	$	83,468
Mortgage notes payable to Company		5,967		—
Other liabilities		996		1,296

Total liabilities		73,962		84,764
Members’ equity		41,523		42,105

Total liabilities and members’ equity	$	115,485	$	126,869

Company’s equity investment	$	20,647	$	21,320

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)


	Year ended December 31,
Income Statement Data	2005			2004			2003
Revenues
Rental	$	10,789		$	10,451		$	6,757
Other		840			776			392

Total revenues		11,629			11,227			7,149

Expenses
Property operating and maintenance		3,689			3,555			3,416
Depreciation and amortization		2,621			2,579			2,481
Interest		2,752			2,658			2,338

Total expenses		9,062			8,792			8,235

Income (loss) from continuing operations		2,567			2,435			(1,086	)

Discontinued Operations
Loss from discontinued operations		(176	)		(355	)		(683	)
Gain on sales of real estate assets		2,834			—			26,179
Loss on early extinguishment of debt		(273	)		—			—

Income (loss) from discontinued operations		2,385			(355	)		25,496


Net income	$	4,952		$	2,080		$	24,410


Company’s share of net income	$	1,767		$	1,083		$	7,790

At December 31, 2005, mortgage notes payable include a $49,999 mortgage note that bears interest at 4.13%, requires monthly interest payments and annual principal payments of $1 through 2009. Thereafter, the note requires monthly principal and interest payments based on a 25-year amortization schedule and matures in 2034. The note is callable by the lender in 2009 and on each successive fifth year anniversary of the note thereafter. The note is prepayable without penalty in 2008. The additional mortgage note payable totaling $17,000 bears interest at a fixed rate of 4.04%, requires interest only payments and matures in 2008.

In early 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 at 1.90%. This note is repayable from the proceeds of condominium sales and matures in February 2008.

5. REAL ESTATE ACQUISITIONS AND DISPOSITIONS

Acquisitions

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, through December 31, 2005, the Company had incurred additional costs of approximately $1,000, of an estimated cost of approximately $1,100 to improve the community. The purchase price of this community was allocated to the assets acquired based on their estimated fair values.

In June 2004, the Company acquired a 499-unit apartment community located in suburban Washington, D.C. for approximately $85,814, including the assumption of mortgage indebtedness and closing costs. Additionally, the Company incurred additional costs of approximately $2,000, to improve the community. The assumed mortgage note payable was valued at $49,496 yielding an effective interest rate of 4.7%. The mortgage note bears interest at a coupon rate of 6.8%, requires monthly principal and interest payments and matures in 2007. The purchase of this community was allocated to the assets acquired and the liabilities assumed based on their estimated fair values.

Subsequent to December 31, 2005, the Company acquired two apartment communities, containing 308 units in Austin, Texas for approximately $46,500, including estimated closing costs.

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

Dispositions

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 December 31, 2005, the Company had one community, originally containing 127 units, that is being converted into condominiums classified as held for sale. This real estate asset is classified separately in the accompanying consolidated balance sheet at $4,591, which represented its remaining net book value. The Company expects to complete the sale of all condominiums at this community in the next twelve months.

In the fourth quarter of 2005, the Company began the conversion of portions of two apartment communities into for-sale condominiums. Under SFAS No. 144, the operating results and future sales activities of these condominium units will be reflected in continuing operations. In addition, the net book value of the assets being converted into condominiums were reflected separately on the consolidated balance sheet under the caption titled “For-sale condominiums.”

Under SFAS No. 144, the operating results of assets designated as held for sale are included in discontinued operations in the consolidated statement of operations for all periods presented. Additionally, all gains and losses on the sale of these assets are included in discontinued operations. For the year ended December 31, 2005, income from discontinued operations included the results of operations of one condominium conversion community classified as held for sale at December 31, 2005 and four apartment communities classified as held for sale in the nine months ended September 30, 2006 (one of which was also sold in 2006) as well as the operations of six communities sold in 2005 through their sale dates and one condominium conversion community through its sell-out date. For the years ended December 31, 2004 and 2003, income from discontinued operations included the results of operations of the one condominium conversion community classified as held for sale at December 31, 2005, four apartment communities classified as held for sale in the nine months ended September 30, 2006 (one of which was also sold in 2006), communities sold in 2005, one condominium conversion community through its sell out date and the results of operations of 12 communities designated as held for sale and sold in 2004 and 2003 through their sale dates.

The revenues and expenses of these communities for the years ended December 31, 2005, 2004 and 2003 were as follows:


	2005		2004			2003
Revenues
Rental	$	27,967	$	56,411		$	83,352
Other		2,805		5,077			6,590

Total revenues		30,772		61,488			89,942

Expenses
Property operating and maintenance (exclusive of items shown separately below)		13,136		25,411			35,687
Depreciation		5,813		11,645			18,144
Interest		5,421		9,321			12,551
Asset impairment charges		—		2,233			17,462
Minority interest in consolidated property partnerships		14		(238	)		(419	)

Total expenses		24,384		48,372			83,425

Income from discontinued operations before minority interest		6,388		13,116			6,517
Minority interest		250		(372	)		(578	)

Income from discontinued operations	$	6,638	$	12,744		$	5,939

For the year ended December 31, 2005, the Company recognized net gains in discontinued operations of $124,425 ($117,593 net of minority interest) from the sale of six communities, containing 3,047 units. The sales generated net proceeds of approximately $229,249, including $81,560 of tax-exempt secured indebtedness assumed by the purchasers.

In addition, for the year ended December 31, 2005, gains on sales of real estate assets included net gains of $16,812 ($15,404 net of minority interest and provision for income taxes) from condominium sales at the Company’s condominium conversion communities reported in discontinued operations. A summary of revenues and costs and expenses of these condominium activities for the year ended December 31, 2005 was as follows:

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)


	2005
Condominium revenues, net	$	51,857
Condominium costs and expenses		(35,045	)

Gains on condominium sales, before minority interest and income taxes		16,812
Minority interest		(814	)
Provision for income taxes		(594	)

Gains on condominium sales, net of minority interest and provision for income taxes	$	15,404

For the year ended December 31, 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. These sales generated net proceeds of approximately $242,962, including $104,325 of tax-exempt debt assumed by the purchasers. For the year ended December 31, 2003, the Company recognized net gains from discontinued operations of $40,792 ($36,497 net of minority interest) on the sale of four communities, containing 1,844 units, and certain land parcels. These sales generated net proceeds of approximately $163,560.

In January 2006, the Company designated one apartment community, containing 696 units, as held for sale. The aggregate net book value of this asset totaled approximately $88,000, which represented the lower of depreciated cost or estimated fair value, less costs to sell, of the assets. In September 2006, the Company designated three additional apartment communities, containing 826 units, as held for sale. The aggregate net book value of these assets totaled approximately $22,600, which represented the lower of depreciated cost or estimated fair value, less costs to sell, of the assets. One of the communities was encumbered by an $18,600 tax exempt mortgage note payable.

6. SHAREHOLDERS’ EQUITY / MINORITY INTEREST

Preferred Stock

At December 31, 2005, the Company had two outstanding series of cumulative redeemable preferred stock with the following characteristics:


					Optional				Stated
	Outstanding		Liquidation		Redemption		Redemption		Dividend			Dividend
Description	Shares		Preference		Date (1)		Price(1)		Yield			Rate
			(per share)				(per share)					(per share)
Series A		900	$	50.00		10/01/26	$	50.00		8.5	%	$	4.25
Series B		2,000	$	25.00		10/28/07	$	25.00		7.625	%	$	1.91


(1)		The preferred stock is redeemable, at the Company’s option, for cash.

In 2004, the Company redeemed its 7.625% series C cumulative redeemable preferred stock (“Series C Preferred Stock”) for $25.00 per share (an aggregate of $50,000), plus accrued and unpaid dividends through the redemption date. In connection with the issuance of the Series C Preferred Stock in 1998, the Company incurred $1,716 in issuance costs and recorded such costs as a reduction of shareholders’ equity. The redemption price of the Series C Preferred Stock exceeded the related carrying value by the $1,716 of issuance costs. In connection with the redemption, in accordance with generally accepted accounting principles, the Company reflected the $1,716 of issuance costs as a reduction of earnings in arriving at net income available to common shareholders in 2004.

Preferred Units

In 2004, the Operating Partnership redeemed its 8.0% Series D cumulative redeemable preferred units (“Series D Preferred Units”) for $25.00 per unit (an aggregate of $70,000), plus accrued and unpaid distributions through the redemption date. In connection with the issuance of the Series D Preferred Units in 1998, the Operating Partnership incurred $1,810 in issuance costs and recorded such costs as a reduction of partners’ equity. The redemption price of the Series D Preferred Units exceeded the related carrying value by the $1,810 of issuance costs. In connection with the redemption, in accordance with generally accepted accounting principles, the Company reflected the $1,810 of issuance costs as a reduction of earnings in arriving at net income available to common shareholders in 2004.

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

Common Stock Purchases

In 2005, the Company repurchased approximately 1,031 shares of its common stock at an aggregate cost of $34,400 under 10b5-1 stock repurchase plans. 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. In 2004, under a previous stock repurchase program, the Company repurchased $2,268 of common stock and $120,000 of preferred stock and units.

Computation of Earnings Per Common Share

For the years ended December 31, 2005, 2004 and 2003, basic and diluted earnings per common share for income (loss) from continuing operations available to common shareholders has been computed as follows:


	Year ended December 31, 2005
	Income			Shares			Per-Share
	(Numerator)			(Denominator)			Amount
Income from continuing operations	$	5,356
Less: Preferred stock dividends		(7,637	)

Basic EPS
Loss from continuing operations available to common shareholders		(2,281	)		40,217		$	(0.06	)

Effect of dilutive securities
Stock options and awards		—			—	(1)

Diluted EPS
Loss from continuing operations available to common shareholders	$	(2,281	)		40,217		$	(0.06	)


	Year ended December 31, 2004
	Income			Shares			Per-Share
	(Numerator)			(Denominator)			Amount
Loss from continuing operations	$	(26,715	)
Less: Preferred stock dividends		(8,325	)
Less: Preferred stock and unit redemption costs		(3,526	)

Basic EPS
Loss from continuing operations available to common shareholders		(38,566	)		39,777		$	(0.97	)

Effect of dilutive securities
Stock options and awards		—			—	(1)

Diluted EPS
Loss from continuing operations available to common shareholders	$	(38,566	)		39,777		$	(0.97	)


	Year ended December 31, 2003
	Income			Shares			Per-Share
	(Numerator)			(Denominator)			Amount
Loss from continuing operations	$	(28,280	)
Less: Preferred stock dividends		(11,449	)

Basic EPS
Loss from continuing operations available to common shareholders		(39,729	)		37,688		$	(1.05	)

Effect of dilutive securities
Stock options and awards		—			—	(1)

Diluted EPS
Loss from continuing operations available to common shareholders	$	(39,729	)		37,688		$	(1.05	)


(1)		For the years ended December 31, 2005, 2004 and 2003, the potential dilution from the Company’s outstanding stock options and awards of 400, 115 and 11 shares, respectively, was antidilutive to the loss from continuing operations per share calculation. As such, these amounts were excluded from weighted average shares.

In 2005, 2004 and 2003, stock options to purchase 3,534, 4,491 and 4,735 shares of common stock, respectively, were excluded from the computation of diluted earnings per share as these options were antidilutive.

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

7. SEVERANCE AND PROXY CONTEST CHARGES

In 2005, the Company recorded an additional expense charge of $796 relating to changes in the estimated future costs of certain benefits granted to former executive officers under prior employment or settlement agreements (see discussion below). The estimated future cost increases primarily related to increased fuel and other operating costs and expenses associated with certain fractional aircraft benefits provided to such executives.

In 2003, the Company recorded charges totaling $21,506 relating to the change in roles from executive to non-executive status of the Company’s former chairman and vice-chairman of the board of directors and relating to the departures of its executive vice president and chief financial officer and its executive vice president of asset management. These charges consisted of amounts representing the discounted present value of the estimated payments to be made to the former chairman and vice-chairman under their existing employment arrangements, amounts representing the discounted present value of estimated net costs to be incurred by the Company relating to its split-dollar life insurance obligations to the individuals under their employment contracts and amounts representing the aggregate amount of the estimated payments and benefits to be made to the other departing executive officers. In 2004, the Company entered into a final settlement agreement with its former chairman of the board of directors. Under the terms of the agreement, the former chairman’s employment and non-competition agreements were terminated and the Company agreed to continue to provide the former chairman certain payments and benefits through 2013, the approximate expiration date of the original employment agreement. Because the present value of the estimated payments under the settlement agreement approximated the Company’s remaining accrued charge under the former employment agreement, no additional charges were recorded in 2004 as a result of the settlement.

The following table summarizes the activity relating to the accrued severance charges for the years ended December 31, 2005, 2004 and 2003:


	2005			2004			2003
Accrued severance charges, beginning of year	$	15,317		$	19,171		$	—
Severance charges		796			—			21,506
Payments for period		(2,694	)		(4,858	)		(3,237	)
Interest accretion		906			1,004			902

Accrued severance charges, end of year	$	14,325		$	15,317		$	19,171

Substantially all of these remaining amounts will be paid over the remaining terms of the former executives’ employment and settlement agreements (8 to 11 years).

In 2003, proxy and related costs of $5,231 represented the legal, advisory and other expenses associated with the solicitation of proxies from shareholders resulting from the proxy contest initiated in April 2003 by the Company’s former chairman of the board of directors. Additionally, the $5,231 amount included the estimated legal and resolution costs associated with the settlement of two derivative and purported class action lawsuits filed against the Company during the proxy contest. These lawsuits were settled in October 2004 (see note 11).

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.

In the preparation of income tax returns in federal and state jurisdictions, the Company and its taxable REIT subsidiaries assert certain tax positions based on their understanding and interpretation of the income tax law. The taxing authorities may challenge such positions and the resolution of such matters could result in the payment and recognition of additional income tax expense. Management believes it has used reasonable judgments and conclusions in the preparation of its income tax returns.

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

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, 2005, 2004 and 2003 is detailed below.


	2005			2004			2003
	(Estimate)			(Actual)			(Actual)
Net income	$	141,948		$	88,219		$	14,156
Add (subtract) net loss (income) of taxable REIT subsidiaries		(6,881	)		402			691

Adjusted net income		135,067			88,621			14,847
Book/tax depreciation difference		(1,320	)		(1,719	)		(4,309	)
Book/tax difference on gains from real estate sales		(9,409	)		(9,806	)		3,010
Other book/tax differences, net		(9,223	)		(9,489	)		20,005

Taxable income before allocation of taxable capital gains		115,115			67,607			33,553
Income taxable as capital gains		(116,739	)		(89,393	)		(35,620	)

Taxable ordinary income (loss)	$	(1,624	)	$	(21,786	)	$	(2,067	)

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 is as follows for the years ended December 31, 2005, 2004 and 2003:


	2005					2004					2003
	Amount		%			Amount		%			Amount		%
Ordinary income	$	—		—		$	—		—		$	0.16		7.4	%
Capital gains		0.99		55.1	%		0.74		40.9	%		0.36		16.8	%
Unrecaptured Section 1250 gains		0.81		44.9	%		1.06		59.1	%		0.31		14.5	%
Return of capital		—		—			—		—			1.30		61.3	%

	$	1.80		100.0	%	$	1.80		100.0	%	$	2.13		100.0	%

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, 2005, 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 $50,803.

Taxable REIT subsidiaries

The Company utilizes taxable REIT subsidiaries (“TRSs”) to perform such non-REIT activities as asset and property management, for-sale housing (condominiums) conversions and sales and other services for third parties. These TRSs are subject to federal and state income taxes. The components of income tax expense, significant deferred tax assets and liabilities and a reconciliation of the TRS income tax expense to the statutory federal rate are reflected in the tables below. For the years ended December 31, 2004 and 2003, the impact of TRSs’ income taxes and their related tax attributes were not material to the accompanying consolidated financial statements.

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

Income tax expense of the TRSs for the year ended December 31, 2005 is comprised of the following:


	2005
Current tax expense
Federal	$	251
State		343

		594


Deferred tax expense
Federal		—
State		—

		—

Total income tax expense		594
Income tax expense — discontinued operations		(594	)

Income tax expense — continuing operations	$	—

In 2005, income tax expense was allocated to discontinued operations as the taxable income of the TRSs resulted from condominium sales activities which are reported in discontinued operations. Deferred tax expense was offset by the reversal of valuation allowances, primarily related to income tax net operating loss carryforwards, that were established in prior years. Net valuation allowances utilized in 2005 totaled approximately $2,700 and total valuation allowances at December 31, 2005 totaled approximately $1,600.

The components of the TRSs’ deferred income tax assets and liabilities at December 31, 2005 and 2004 were as follows:


	2005			2004
Deferred tax assets
Real estate asset basis differences	$	1,106		$	1,106
Tax NOLs		415			3,300
Accrued liabilities		641			—
Other		269			769

		2,431			5,175


Deferred tax liabilities
Amortization		(797	)		(824	)

		(797	)		(824	)

Net deferred tax assets, before valuation allowances		1,634			4,351
Valuation allowances		(1,634	)		(4,351	)

Net deferred tax assets (liabilities)	$	—		$	—

At December 31, 2005, the Company’s taxable REIT subsidiaries had consolidated federal income tax net operating loss carryforwards totaling approximately $1,200. These tax loss carryforwards begin to expire in 2021. At December 31, 2005 and 2004, management had established valuation allowances against the deferred tax asset associated with these net operating loss carryforwards and other net deferred tax assets due primarily to the historical losses and variability of the income of these subsidiaries. The tax benefits associated with such valuation allowances may be recognized in future periods, if the taxable REIT subsidiaries generate sufficient taxable income to utilize such amounts or if the Company determines that it is more likely than not that the related deferred tax assets are realizable.

A reconciliation of income tax expense of the TRSs to the federal statutory rate is detailed below. As shown above, 2005 income tax expense was allocated to discontinued operations.


	2005
Federal tax rate		35	%
State income tax, net of federal benefit		4	%
Federal alternative minimum taxes		3	%
Change in valuation allowance of deferred tax assets		(35	)%

		7	%

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

9. STOCK-BASED COMPENSATION PLANS

Stock Compensation Plans

Effective January 1, 2003, the Company elected to voluntarily change its method of accounting for stock-based compensation to the fair value method prescribed in SFAS No. 123 (see note 1). The Company elected the prospective method of adoption prescribed by SFAS No. 148. For stock-based compensation granted prior to January 1, 2003, the Company accounted for stock-based compensation under the intrinsic value method prescribed by APB No. 25. A table in note 1 summarizes the Company’s net income and earnings per common share had the fair value method of accounting under SFAS No. 123 been applied for all stock-based compensation for the years ended December 31, 2005, 2004 and 2003.

Incentive Stock Plans

The Company’s 2003 Incentive Stock Plan (the “2003 Stock Plan”) was approved by the Company’s shareholders in May 2003. Under the 2003 Stock Plan, an aggregate of 4,000 shares of common stock were reserved for issuance. Of this amount, not more than 500 shares of common stock are available for grants of restricted stock. The exercise price of each option granted under the 2003 Stock Plan may not be less than the market price of the Company’s common stock on the date of the option grant and all options may have a maximum life of ten years. Participants receiving restricted stock grants are generally eligible to vote such shares and receive dividends on such shares. Substantially all stock option and restricted stock grants are subject to annual vesting provisions (generally three to five years) as determined by the administrative committee overseeing the 2003 Stock Plan. At December 31, 2005, stock options outstanding under the 2003 Stock Plan totaled 1,150. The Company’s former stock plan (the “1993 Stock Plan”) expired in July 2003. At December 31, 2005, stock options outstanding under the 1993 Stock Plan totaled 2,384.

In 2005, 2004 and 2003, the Company granted stock options to purchase 277, 283 and 1,252 shares of Company common stock to Company officers and directors, of which 50, 50 and 100 shares in 2005, 2004 and 2003, respectively, were granted to the Company’s non-executive chairman of the board. For the years ended December 31, 2005, 2004 and 2003, the Company recorded compensation expense related to stock options of $761 ($723 net of minority interest), $590 ($553, net of minority interest) and $244 ($218, net of minority interest), respectively, recognized under the fair value method.

The following table summarizes the weighted average assumptions used in the calculation of the fair value of stock options granted using the Black-Scholes option-pricing model.


	2005			2004			2003
Dividend yield		5.5	%		6.3	%		6.5	%
Expected volatility		17.1	%		16.9	%		17.1	%
Risk-free interest rate		3.1	%		3.1	%		2.9	%
Expected option life	5 years			5 years			5 years

A summary of stock option activity under all plans for the years ended December 31, 2005, 2004 and 2003, is presented below.


	2005					2004					2003
				Weighted					Weighted					Weighted
				Average					Average					Average
	Shares			Exercise Price		Shares			Exercise Price		Shares			Exercise Price
Outstanding at beginning of year		4,491		$	33		4,735		$	34		4,089		$	35
Granted		277			33		283			28		1,252			26
Exercised		(1,105	)		33		(277	)		29		(217	)		28
Forfeited		(129	)		30		(250	)		36		(389	)		32

Outstanding at end of year		3,534			34		4,491			33		4,735			34

Options exercisable at year-end		2,437					3,131					3,233

Weighted-average fair value of options granted during the year	$	2.73				$	1.86				$	1.59

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

outstanding with exercise prices ranging from $36.13 to $44.13. These options have a weighted average exercise price of $38.16 and a weighted average remaining contractual life of 3 years. Of these outstanding options, 1,980 were exercisable at December 31, 2005 at a weighted average exercise price of $37.56.

In 2005, 2004 and 2003, the Company granted 35, 27 and 175 shares of restricted stock, respectively, to Company officers and directors, of which 6, 7 and 8 shares in 2005, 2004 and 2003, respectively, were granted to the Company’s non-executive chairman of the board. The restricted shares granted in 2005 and 2004 vest ratably over three to five year periods. The restricted shares granted in 2003 vest ratably over three to eight year periods. For each year, the total value of the restricted share grants of $1,173, $777 and $4,555, respectively, was initially reflected in shareholders’ equity as additional paid-in capital and as deferred compensation, a contra-shareholders’ equity account. Such deferred compensation is amortized ratably into compensation expense over the applicable vesting period. Total compensation expense relating to the restricted stock was $1,367, $1,109 and $742 in 2005, 2004 and 2003, respectively.

Employee Stock Purchase Plan

The Company maintains an Employee Stock Purchase Plan (the “2005 ESPP”) under a plan approved by Company shareholders in 2005. The provisions of the 2005 ESPP are substantially similar to the Company’s former ESPP, terminated in December 2004, with certain exceptions including that the maximum number of shares issuable under the 2005 ESPP will be 300. To participate in the ESPP, (i) directors 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; provided, an individual who is a director and who is an employee shall be a participant exclusively with respect to his or her status as an employee. 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.

Effective January 1, 2003, under SFAS No. 123, the Company records the aggregate cost of the ESPP (generally the 15% discount on the share purchases) as a period expense. Total compensation expense relating to the ESPP was $171, $86 and $85 in 2005, 2004 and 2003, respectively.

10. EMPLOYEE BENEFIT PLAN

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 was 5% in 2005 (4% in 2004 and 2003) of salary. Company contributions of $691, $541 and $513 were made to this plan in 2005, 2004 and 2003, respectively.

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 and four ground leases expiring in 2012, 2038, 2066 and 2074 for four separate operating communities and to other facility, office, equipment and other operating leases with terms expiring through 2057. 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. Future minimum lease payments for non-cancelable land, office, equipment and other leases at December 31, 2005, are as follows:


2006	$	1,665
2007		1,625
2008		1,638
2009		1,628
2010		1,634
2011 and thereafter		167,857

The Company incurred $5,058, $4,981 and $4,382 of rent expense, including rent expense under short-term rental and lease arrangements, for the years ended December 31, 2005, 2004 and 2003, respectively.

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

Legal proceedings

On May 13, 2004, an alleged Company shareholder filed a purported pro se derivative and direct action in the Superior Court of Fulton County, Georgia, against the Company, certain members of the Company’s board of directors, and certain of its executive officers. The case was removed to the United States District Court for the Northern District of Georgia on May 21, 2004. The complaint alleged, among other things, breaches of fiduciary duties, fraud, corporate waste, withholding certain documents from shareholder inspection and certain securities laws claims. The complaint requested various types of relief, such as injunctive relief and damages and demanded production of certain Company records. Because the Company believed the allegations were wholly without merit, the Company moved to dismiss the litigation. On April 20, 2005, the court entered an order dismissing all claims without prejudice, save a claim seeking production of certain Company records, upon which the Court declined to rule, concluding it lacked jurisdiction to do so, and ordered the claim remanded to the Superior Court of Fulton County. Since that time, the Company has moved for its attorney fees in the United States District Court, arguing that the plaintiff frivolously pursued the litigation, and the plaintiff has moved for entry of judgment in Superior Court, which the Company has vigorously contested. In February 2006, the United States District Court granted the Company’s motion for attorneys’ fees in an amount to be determined by the agreement of the parties, or, alternatively, by the Court.

On May 5, 2003, the Company received notice that a shareholder derivative and purported class action lawsuit was filed against members of the board of directors of the Company and the Company as a nominal defendant. This complaint was filed in the Superior Court of Fulton County, Atlanta, Georgia on May 2, 2003 and alleged various breaches of fiduciary duties by the board of directors of the Company and sought, among other relief, the disclosure of certain information by the defendants. This complaint also sought to compel the defendants to undertake various actions to facilitate a sale of the Company. On May 7, 2003, the plaintiff made a request for voluntary expedited discovery. On May 13, 2003, the Company received notice that a similar shareholder derivative and purported class action lawsuit was filed against certain members of the board of directors of the Company and against the Company as a nominal defendant. The complaint was filed in the Superior Court of Fulton County, Atlanta, Georgia on May 12, 2003 and alleged breaches of fiduciary duties, abuse of control and corporate waste by the defendants. The plaintiff sought monetary damages and, as appropriate, injunctive relief. These lawsuits were settled, and in October 2004, the Superior Court of Fulton County entered an order approving the settlement and related orders dismissing the litigation. The estimated legal and settlement costs, not covered by insurance, associated with the expected resolution of the lawsuits were recorded in the second quarter of 2003 as a component of a proxy contest and related costs charge. An alleged Company shareholder, who had filed a separate purported derivative and direct action against the Company and certain of its officers and directors (which is described in the paragraph above), has appealed from the Superior Court’s orders approving the settlement, overruling the shareholder’s objection to the settlement denying the shareholder’s motion to intervene, and dismissing the litigation with prejudice. In November 2005, the Georgia Court of Appeals affirmed the orders. In December 2005, the alleged Company shareholder asked the Georgia Supreme Court to review the case, and his petition remains pending.

The Company is involved in various other legal proceedings incidental to its business from time to time, most of which are expected to be covered by liability or other insurance. Management believes that any resolution of pending proceedings or liability to the Company which may arise as a result of these proceedings will not have a material adverse effect on the Company’s results of operations or financial position.

12. RELATED PARTY TRANSACTIONS

In 2005, 2004 and 2003, the Company held investments in Property LLC’s accounted for under the equity method of accounting (see note 4). In 2005, 2004 and 2003, the Company recorded, before elimination of the Company’s equity interests, development fees, general construction contract billings, management fees and expense reimbursements (primarily personnel costs) of approximately $1,781, $1,756 and $2,913, respectively, from these related companies. Additionally in 2005, 2004 and 2003, the Company earned interest under mortgage and construction loans to the Project LLCs totaling $437, $308 and $3,186, respectively. The Company portion of all significant intercompany transactions was eliminated in the accompanying consolidated financial statements.

In prior years, the Company provided landscaping services for executive officers, employees, directors and other related parties. For the year ended December 31, 2003, the Company received landscaping revenue of $742 for such services. Such revenue includes reimbursement of direct and indirect expenses.

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

At December 31, 2005 and 2004, the Company had outstanding loan balances to certain current and former company executives totaling $2,485 and $5,095, respectively. These loans mature ten years from their 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. Additionally, at December 31, 2005 and 2004, the Company had outstanding additional loans to certain company executives totaling $640 and $780, respectively. 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 $140, $140 and $160 was recorded as compensation expense in 2005, 2004 and 2003, respectively.

13. DERIVATIVE FINANCIAL INSTRUMENTS

At December 31, 2005, the Company had outstanding one interest rate swap agreement with a notional value of approximately $97,100 with a maturity date in 2009. At December 31, 2004, the Company had interest rate swaps with notional values of $123,000. At December 31, 2005 and 2004, the fair value of the interest rate swap agreements represented liabilities of $4,021 and $8,927, respectively, and the liabilities were included in consolidated liabilities in the accompanying consolidated balance sheets. The Company recorded the changes in the fair value of these cash flow hedges as changes in accumulated other comprehensive income (loss), a shareholders’ equity account, in the accompanying consolidated balance sheet.

At December 31, 2005, the Company had outstanding one interest rate cap agreement with a financial institution with a notional value of $28,495. This interest rate cap agreement is cash flow hedge that provides a fixed interest ceiling at 5% for the Company’s variable rate, tax-exempt borrowings aggregating $28,495 at December 31, 2005. The Company is required to maintain the interest rate exposure protection under the terms of the financing arrangements. The interest rate cap arrangements are included on the accompanying balance sheet at fair value. At December 31, 2005, the difference between the amortized costs of the interest rate cap arrangement and their fair value of $5 is included in accumulated other comprehensive income (loss), a shareholders’ equity account. The original cost of $362 of the arrangements is being amortized to expense over their five-year term.

In 2005, in connection with the sale of three communities discussed in note 5 above, the Company sold its interest in interest rate cap agreements with notional values of $81,560 for aggregate proceeds of $17 and realized losses of $955 ($902 net of minority interest) that were included in the loss on early extinguishment of indebtedness associated with asset sales on the accompanying statement of operations. In 2004, in connection with the sale of five communities discussed in note 5 above, the Company sold its interest in interest rate cap agreements with notional values of $104,325 for aggregate proceeds of $379 and realized losses of $941 ($877 net of minority interest) that was included in the loss on early extinguishment of indebtedness associated with asset sales on the accompanying statement of operations. The unrealized losses on these interest rate cap agreements were previously reflected in accumulated other comprehensive income (loss), a shareholder’s equity account. These interest rate cap agreements were sold and the underlying hedged indebtedness was assumed by the purchasers in connection with the sale of the related assets.

The impact of the change in the value of the derivatives on comprehensive income (loss) is included in the statement of shareholders’ equity. Amounts reported in accumulated other comprehensive income related to these derivatives will be reclassified to interest expense as schedule interest payments are made on the Company’s hedge indebtedness. At December 31, 2005, the Company estimates that $1,470 will be reclassified from accumulated other comprehensive income as an increase in interest expense during the next twelve months.

14. 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.

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

Cash equivalents, rents and accounts receivables, accounts payable, accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair values because of the short-term nature of these instruments. At December 31, 2005, the fair value of fixed rate debt was approximately $767,271 (carrying value of $753,641) and the fair value of floating rate debt approximated its carrying value due to the adjustable nature of the arrangements. At December 31, 2004, the fair value of fixed rate debt was approximately $891,579 (carrying value of $845,175) and the fair value of floating rate debt approximated its carrying value due to the adjustable nature of the arrangements.

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, 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, as amended. At December 31, 2005, the carrying amounts of the interest rate swap arrangement represented a net liability totaling $4,021 and the carrying value of the interest rate cap arrangement represented a net asset of $5. At December 31, 2004, the carrying amounts of the interest rate swap arrangements represented net liabilities totaling $8,927 and the carrying value of the interest rate cap arrangements represented net assets of $110.

Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 2005. 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.

15. 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 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. 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 and other ancillary service and support operations are combined in the line item “other property segments” in the accompanying segment information. The segment information presented below reflects the segment categories based on the lifecycle status of each community as of December 31, 2005. The segment information for the years ended December 31, 2004 and 2003 have been adjusted due to the restatement impact of reclassifying the operating results of the assets designated as held for sale in 2005 and 2006 to discontinued operations under SFAS No. 144 (see note 5).

	•		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 prior year — communities which reached stabilized occupancy in the prior year.

	•		Condominium conversion communities — those portions of existing apartment communities being converted into condominiums that are reflected in continuing operations under SFAS No. 144 (see note 1).

	•		Acquired communities — those communities acquired in the current or prior year.

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

Segment Performance Measure

Management uses contribution to consolidated property net operating income (“NOI”) as the performance measure for its operating segments. Net operating income is defined as rental and other revenue from real estate operations less total property and maintenance expenses from real estate operations (excluding depreciation and amortization).

Segment Information

The following table reflects each segment’s contribution to consolidated revenues and NOI together with a reconciliation of segment contribution to NOI to consolidated net income for the years ended December 31, 2005, 2004 and 2003. 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 is not reported internally at the segment level.


	Year ended December 31,
	2005			2004			2003
Revenues
Fully stabilized communities	$	234,803		$	227,823		$	224,757
Communities stabilized during prior year		7,184			7,007			2,008
Condominium conversion communities		5,485			5,716			5,523
Acquired communities		10,808			4,477			—
Other property segments		21,961			20,769			19,112
Other		255			1,000			457

Consolidated revenues	$	280,496		$	266,792		$	251,857


Contribution to Property Net Operating Income
Fully stabilized communities	$	143,432		$	139,351		$	139,608
Communities stabilized during prior year		4,957			4,885			115
Condominium conversion communities		3,613			3,675			3,569
Acquired communities		7,230			3,163			—
Other property segments, including corporate management expenses		(7,106	)		(6,702	)		(4,015	)

Consolidated property net operating income		152,126			144,372			139,277


Interest income		661			817			894
Other revenues		255			1,000			457
Minority interest in consolidated property partnerships		239			671			1,605
Depreciation		(70,435	)		(73,665	)		(71,832	)
Interest		(55,638	)		(59,763	)		(58,309	)
Amortization of deferred financing costs		(4,661	)		(4,304	)		(3,801	)
General and administrative		(18,307	)		(18,205	)		(13,841	)
Investment, development and other		(5,242	)		(2,930	)		(2,715	)
Termination of debt remarketing agreement (interest expense)		—			(10,615	)		—
Loss on early extinguishment of indebtedness		—			(4,011	)		—
Severance charges		(796	)		—			(21,506	)
Proxy contest and related costs		—			—			(5,231	)
Equity in income of unconsolidated real estate entities		1,767			1,083			7,790
Gain on sale of technology investment		5,267			—			—
Minority interest of preferred unitholders		—			(3,780	)		(5,600	)
Minority interest of common unitholders		120			2,615			4,532


Income (loss) from continuing operations		5,356			(26,715	)		(28,280	)
Income from discontinued operations		136,592			114,934			42,436

Net income	$	141,948		$	88,219		$	14,156

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

16. SUPPLEMENTAL CASH FLOW INFORMATION

Non-cash investing and financing activities for the years ended December 31, 2005, 2004 and 2003 were as follows:

In 2005, the Company sold three apartment communities subject to $81,560 of tax-exempt mortgage indebtedness assumed by the purchasers. In 2004, the Company sold certain apartment communities subject to $104,325 of tax-exempt mortgage indebtedness assumed by the purchasers. Additionally in 2004, the Company acquired an apartment community, including the assumption of mortgage indebtedness with an estimated fair value of $49,496. These transactions were excluded from the cash flow statement as a non-cash transactions.

In 2005, the Company’s derivative financial instruments increased in value causing a decrease in accounts payable and accrued expenses and a corresponding increase in shareholders’ equity of $5,559, net of minority interest. In 2004, the Company’s derivative financial instruments increased in value causing a decrease in accounts payable and accrued expenses and a corresponding increase in shareholders’ equity of $3,694, net of minority interest. In 2003, the Company’s derivative financial instruments increased in value causing a decrease in accounts payable and accrued expenses and a corresponding increase in shareholders’ equity of $2,460, net of minority interest.

In 2005, 2004 and 2003, Common Units in the Operating Partnership totaling 1,097, 1,168 and 1,162, respectively, were converted into Company common shares on a one-for-one basis. The net effect of the conversion of Common Units of the Operating Partnership to common shares of the Company and the adjustments to minority interest for the impact of the Company’s employee stock purchase and stock options plans, decreased minority interest and increased shareholders’ equity in the amounts of $20,444, $19,848 and $20,802 for the years ended December 31, 2005, 2004 and 2003, respectively.

The Operating Partnership committed to distribute $19,257, $19,203 and $19,043 for the quarters ended December 31, 2005, 2004 and 2003, respectively. As a result, the Company declared dividends of $18,626, $18,078 and $17,391 for the quarters ended December 31, 2005, 2004 and 2003, respectively. The remaining distributions from the Operating Partnership in the amount of $631, $1,125 and $1,652 for the quarters ended December 31, 2005, 2004 and 2003, respectively, are distributed to minority interest unitholders in the Operating Partnership.

In 2005, under an amended and restated deferred compensation plan for directors and officers, Company common shares were issued to the plan in settlement of the Company’s variable obligation relating to changes in the value of its common shares due the directors under the prior deferred compensation plan. This common share issuance totaling $1,568 was a non-cash transaction. In addition, common shares issued quarterly for director compensation, totaling $194 in 2005, were also non-cash transactions.

In 2005, the Company’s taxable REIT subsidiaries made income tax payments to federal and state taxing authorities totaling $760. Such income tax payments were not material in 2004 and 2003 due to the existence of tax loss carryforwards at the taxable REIT subsidiaries (see note 8).

17. SALE OF TECHNOLOGY INVESTMENT

In 2005, the Company sold its investment in Rent.com, a privately-held internet leasing company, and recognized a gain of $5,267.

Post Properties, Inc.

POST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)

18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Under SFAS No. 144, as further discussed in note 5, the operating results of apartment communities classified as held for sale were included in discontinued operations in the accompanying statements of operations for all periods presented. To conform with this presentation, the quarterly financial information presented below reflects the reclassification of the operating results of these assets to discontinued operations, which in 2004 differ from the presentation of discontinued operations included in the Company’s previously issued financial statements included in its quarterly reports on Form 10-Q filed in 2004. Due to the timing of discontinued operations, the quarterly financial information presented below is consistent with the Company’s quarterly financial information reported in its 2005 Form 10-Qs. Quarterly financial information for the years ended December 31, 2005 and 2004, as revised to reflect the change discussed above was as follows:


	Year ended December 31, 2005
	First			Second			Third			Fourth
Revenues	$	67,646		$	69,130		$	71,900		$	71,820

Income (loss) from continuing operations		1,151			(898	)		1,594			3,509
Income from discontinued operations		3,525			59,343			71,647			2,077

Net income		4,676			58,445			73,241			5,586
Dividends to preferred shareholders		(1,909	)		(1,910	)		(1,909	)		(1,909	)

Net income available to common shareholders	$	2,767		$	56,535		$	71,332		$	3,677

Earnings per common share:
Net income available to common shareholders — basic	$	0.07		$	1.42		$	1.77		$	0.09
Net income available to common shareholders — diluted	$	0.07		$	1.42		$	1.75		$	0.09


	Year ended December 31, 2004
	First			Second			Third			Fourth
Revenues	$	64,696		$	65,877		$	68,850		$	67,369

Loss from continuing operations		(3,470	)		(3,869	)		(4,157	)		(15,219	)
Income from discontinued operations		6,881			104,977			2,364			712

Net income (loss)		3,411			101,108			(1,793	)		(14,507	)
Dividends to preferred shareholders		(2,597	)		(1,910	)		(1,909	)		(1,909	)
Redemption costs on preferred stock and units		(1,716	)		—			(1,810	)		—

Net income (loss) available to common shareholders	$	(902	)	$	99,198		$	(5,512	)	$	(16,416	)

Earnings per common share:
Net income (loss) available to common shareholders — basic	$	(0.02	)	$	2.49		$	(0.14	)	$	(0.41	)
Net income (loss) available to common shareholders — diluted	$	(0.02	)	$	2.49		$	(0.14	)	$	(0.41	)

19. OTHER EVENTS

Subsequent to the filing of the Company’s annual report on Form 10-K, as amended, the Company revised its consolidated financial statements for the years ended December 31, 2005, 2004 and 2003, to reflect four apartment communities classified as held for sale (one of which was sold in 2006) in the nine months ended September 30, 2006, which were not classified as held for sale as of December 31, 2005, as discontinued operations, pursuant to certain provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long Lived Assets.” Accordingly, the Company has retrospectively adjusted its audited financial statements for the years ended December 31, 2005, 2004 and 2003 to reflect the disposition of these apartment communities that met the criteria to be classified as discontinued operations. The effect of the retrospective adjustment represents a $1,272, $433 and $1,395 decrease in the Company’s previously reported income (loss) from continuing operations for the years ended December 31, 2005, 2004 and 2003, respectively. As a result of the foregoing, Notes 5, 6, 15 and 18 (unaudited) to the consolidated financial statements for the years ended December 31, 2005, 2004 and 2003 have been retrospectively adjusted. This retrospective adjustment has no effect on the Company’s reported net income, net income available to common shareholders, financial condition or net cash flows.

Post Apartment Homes, L.P.

Consolidated Financial Statements

December 31, 2005 and 2004

Post Apartment Homes, L.P.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Post Apartment Homes, L.P. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of the management of Post Apartment Homes, L.P., including the Partnership’s principal executive officer and principal financial officer, Partnership management conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2005 based on the framework inInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its evaluation under the framework inInternal Control – Integrated Framework, the management of Post Apartment Homes, L.P. concluded that its internal control over financial reporting was effective as of December 31, 2005. Management’s assessment of the effectiveness of the Partnership’s internal control over financial reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Post Apartment Homes, L.P.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Partners of Post Apartment Homes, L.P.:

We have completed integrated audits of Post Apartment Homes, L.P. 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005, and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the Post Apartment Homes, L.P. index appearing under Item 15(a) present fairly, in all material respects, the financial position of Post Apartment Homes, L.P. and subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements 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.

Internal control over financial reporting

PricewaterhouseCoopers LLP
Atlanta, Georgia

March 15, 2006, except with respect to our opinion on the consolidated financial statements insofar as it relates to the effects of discontinued operations discussed in Note 19, as to which date is December 8, 2006

Post Apartment Homes, L.P.

POST APARTMENT HOMES, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)


	December 31,
	2005			2004
Assets
Real estate assets
Land	$	266,914		$	266,520
Building and improvements		1,789,479			1,887,514
Furniture, fixtures and equipment		207,497			214,954
Construction in progress		47,005			19,527
Land held for future development		62,511			18,910

		2,373,406			2,407,425
Less: accumulated depreciation		(516,954	)		(498,367	)
For-sale condominiums		38,338			—
Assets held for sale, net of accumulated depreciation of $0 and $26,332 at December 31, 2005 and 2004, respectively		4,591			68,661

Total real estate assets		1,899,381			1,977,719
Investments in and advances to unconsolidated real estate entities		26,614			21,320
Cash and cash equivalents		6,410			123
Restricted cash		4,599			1,844
Deferred charges, net		11,624			15,574
Other assets		32,826			37,262

Total assets	$	1,981,454		$	2,053,842

Liabilities and Partners’ Equity
Indebtedness, including $0 and $34,060 of debt secured by assets held for sale at December 31, 2005 and 2004, respectively	$	980,615		$	1,129,478
Accounts payable and accrued expenses		58,474			58,837
Dividend and distribution payable		19,257			19,203
Accrued interest payable		5,478			7,677
Deposits and prepaid rents		9,857			7,236

Total liabilities		1,073,681			1,222,431

Commitments and contingencies
Partners’ equity
Preferred units		95,000			95,000
Common units
General partner		9,722			8,673
Limited partner		807,403			737,940
Accumulated other comprehensive income (loss)		(4,352	)		(10,202	)

Total partners’ equity		907,773			831,411

Total liabilities and partners’ equity	$	1,981,454		$	2,053,842

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

Post Apartment Homes, L.P.

POST APARTMENT HOMES, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit data)


	Year ended December 31,
	2005			2004			2003
Revenues
Rental	$	264,763		$	251,661		$	238,323
Other property revenues		15,478			14,131			13,077
Other		255			1,000			457

Total revenues		280,496			266,792			251,857

Expenses
Property operating and maintenance (exclusive of items shown separately below)		128,115			121,420			112,123
Depreciation		70,435			73,665			71,832
General and administrative		18,307			18,205			13,841
Investment, development and other		5,242			2,930			2,715
Proxy contest and related costs		—			—			5,231
Severance charges		796			—			21,506

Total expenses		222,895			216,220			227,248


Operating income		57,601			50,572			24,609

Interest income		661			817			894
Interest expense		(55,638	)		(59,763	)		(58,309	)
Amortization of deferred financing costs		(4,661	)		(4,304	)		(3,801	)
Equity in income of unconsolidated real estate entities		1,767			1,083			7,790
Gains on sale of technology investment		5,267			—			—
Termination of debt remarketing agreement (interest expense)		—			(10,615	)		—
Loss on early extinguishment of indebtedness		—			(4,011	)		—
Minority interest in consolidated property partnerships		239			671			1,605

Income (loss) from continuing operations		5,236			(25,550	)		(27,212	)

Discontinued operations
Income from discontinued operations		6,388			13,116			6,517
Gains on sales of real estate assets, net of provision for income tax		140,643			113,739			40,792
Loss on early extinguishment of indebtedness associated with property sales		(3,220	)		(4,128	)		—

Income from discontinued operations		143,811			122,727			47,309

Net income		149,047			97,177			20,097
Distributions to preferred unitholders		(7,637	)		(12,105	)		(17,049	)
Redemption costs on preferred units		—			(3,526	)		—

Net income available to common unitholders	$	141,410		$	81,546		$	3,048


Per common unit data — Basic
Loss from continuing operations (net of preferred distributions and redemption costs)	$	(0.06	)	$	(0.97	)	$	(1.05	)
Income from discontinued operations		3.40			2.89			1.12

Net income available to common unitholders	$	3.34		$	1.92		$	0.07

Weighted average common units outstanding		42,353			42,474			42,134

Per common unit data — Diluted
Loss from continuing operations (net of preferred distributions and redemption costs)	$	(0.06	)	$	(0.97	)	$	(1.05	)
Income from discontinued operations		3.40			2.89			1.12

Net income available to common unitholders	$	3.34		$	1.92		$	0.07

Weighted average common units outstanding		42,353			42,474			42,134

Common distributions declared	$	1.80		$	1.80		$	1.80

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

Post Apartment Homes, L.P.

POST APARTMENT HOMES, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(In thousands, except per unit data)


																Accumulated Other
	Preferred			Common			Preferred			General			Limited			Comprehensive
	Units			Units			Units			Partner			Partner			Income (Loss)			Total
	(No. of Units)			(No. of Units)
Partners’ Equity, December 31, 2002		7,700			42,032		$	215,000		$	9,143		$	786,682		$	(16,849	)	$	993,976
Comprehensive income
Net income		—			—			17,049			30			3,018			—			20,097
Net change in derivative value		—			—			—			—			—			2,702			2,702

Total comprehensive income		—			—															22,799
Contributions from the Company related to employee stock purchase and stock option plans		—			148			—			41			4,098			—			4,139
Contributions from the Company related to shares issued for restricted stock, net of deferred compensation		—			174			—			7			735			—			742
Equity-based compensation		—			—			—			2			242			—			244
Distributions to preferred Unitholders		—			—			(17,049	)		—			—			—			(17,049	)
Distributions to common Unitholders ($1.80 per unit)		—			—			—			(759	)		(75,157	)		—			(75,916	)

Partners’ Equity, December 31, 2003		7,700			42,354			215,000			8,464			719,618			(14,147	)		928,935
Comprehensive income
Net income		—			—			12,105			851			84,221			—			97,177
Net change in derivative value, net of minority interest		—			—			—			—			—			3,945			3,945

Total comprehensive income		—			—															101,122
Contributions from the Company related to employee stock purchase and stock option plans		—			366			—			105			10,360			—			10,465
Contributions from the Company related to shares issued for restricted stock, net of deferred compensation		—			25			—			11			1,098			—			1,109
Redemption of preferred units		(4,800	)		—			(120,000	)		—			—			—			(120,000	)
Equity-based compensation		—			—			—			7			669			—			676
Purchase of common units		—			(82	)		—			—			(2,268	)		—			(2,268	)
Distributions to preferred Unitholders		—			—			(12,105	)		—			—			—			(12,105	)
Distributions to common Unitholders ($1.80 per unit)		—			—			—			(765	)		(75,758	)		—			(76,523	)

Partners’ Equity, December 31, 2004		2,900			42,663			95,000			8,673			737,940			(10,202	)		831,411
Comprehensive income
Net income		—			—			7,637			1,414			139,996			—			149,047
Net change in derivative value		—			—			—			—			—			5,850			5,850

Total comprehensive income		—			—															154,897
Contributions from the Company related to employee stock purchase and stock option plans		—			1,138			—			378			37,463			—			37,841
Contributions from the Company related to shares issued for restricted stock, net of deferred compensation		—			26			—			14			1,353			—			1,367
Equity-based compensation		—			—			—			9			917			—			926
Purchase of common units		—			(1,031	)		—			—			(34,400	)		—			(34,400	)
Distributions to preferred Unitholders		—			—			(7,637	)		—			—			—			(7,637	)
Distributions to common Unitholders ($1.80 per unit)		—			—			—			(766	)		(75,866	)		—			(76,632	)

Partners’ Equity, December 31, 2005		2,900			42,796		$	95,000		$	9,722		$	807,403		$	(4,352	)	$	907,773

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

Post Properties, Inc.
Post Apartment Homes, L.P.

POST APARTMENT HOMES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except per unit data)


	Year Ended December 31,
	2005			2004			2003
Cash Flows From Operating Activities
Net income	$	149,047		$	97,177		$	20,097
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		76,248			85,310			89,975
Amortization of deferred loan costs		4,661			4,304			3,801
Gains on sales of real estate assets – discontinued operations		(140,643	)		(113,739	)		(40,792	)
Gains on sale of technology investment		(5,267	)		—			—
Asset impairment charges					2,233			17,462
Equity in income of unconsolidated real estate entities		(1,634	)		(941	)		(7,790	)
Distribution of earnings of unconsolidated entities		2,033			1,928			—
Equity-based compensation		2,293			1,785			1,071
Deferred compensation		194			—			—
Loss on early extinguishment of indebtedness		2,264			4,302			—
Changes in assets, (increase) decrease in:
Restricted cash		(2,755	)		221			(696	)
Other assets		(1,257	)		(2,858	)		4,676
Deferred charges		(1,082	)		(361	)		(2,210	)
Changes in liabilities, increase (decrease) in:
Accrued interest payable		(2,199	)		754			(2,071	)
Accounts payable and accrued expenses		2,237			(356	)		8,386
Deposits and prepaid rents		2,621			(654	)		(360	)

Net cash provided by operating activities		86,761			79,105			91,549

Cash Flows From Investing Activities
Construction and acquisition of real estate assets, net of payables		(112,527	)		(42,777	)		(24,179	)
Net proceeds from property sales		199,546			138,637			163,560
Proceeds from sale of technology investment		5,267			—			—
Capitalized interest		(2,907	)		(1,078	)		(3,555	)
Recurring capital expenditures		(9,921	)		(9,884	)		(9,473	)
Non-recurring capital expenditures		(4,508	)		(4,605	)		(5,152	)
Revenue generating capital expenditures		—			(26	)		(1,240	)
Corporate additions and improvements		(1,771	)		(681	)		(799	)
Distributions from (investments in and advances to) unconsolidated entities		(5,846	)		52,287			115,033
Note receivable collections		2,960			—			—

Net cash provided by investing activities		70,293			131,873			234,195

Cash Flows From Financing Activities
Proceeds from indebtedness		100,000			135,000			—
Payments on indebtedness		(217,934	)		(115,753	)		(103,875	)
Payment of financing costs		(1,211	)		(5,631	)		—
Lines of credit proceeds (repayments), net		50,631			(21,262	)		(124,358	)
Redemption of preferred units		—			(120,000	)		—
Redemption of common units		(34,400	)		(2,268	)		—
Contributions from company related to employee stock purchase and stock option plans		36,084			10,465			4,139
Capital contributions (distributions) of minority interests		283			(3,806	)		—
Distributions to preferred unitholders		(7,637	)		(12,571	)		(17,049	)
Distributions to common unitholders		(76,583	)		(76,363	)		(89,657	)

Net cash used in financing activities		(150,767	)		(212,189	)		(330,800	)

Net increase (decrease) in cash and cash equivalents		6,287			(1,211	)		(5,056	)
Cash and cash equivalents, beginning of period		123			1,334			6,390

Cash and cash equivalents, end of period	$	6,410		$	123		$	1,334

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

Post Apartment Homes, L.P.

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, and its subsidiaries develop, own and manage upscale multi-family apartment communities in selected markets in the United States. Post Properties, Inc. (the “Company”) through its wholly-owned subsidiaries is the sole general partner, a limited partner and owns a majority interest in the Operating Partnership. The Operating Partnership, through its operating divisions and subsidiaries conducts substantially all of the on-going operations of Post Properties, Inc., a publicly traded company which operates as a self-administered and self-managed real estate investment trust.

At December 31, 2005, the Company owned 96.7% of the common limited partnership interests (“Common Units”) in the Operating Partnership and 100% of the preferred limited partnership interests (“Preferred Units”). The Company’s weighted average common ownership interest in the Operating Partnership was 95.0%, 93.7% and 89.5% for the years ended December 31, 2005, 2004 and 2003 respectively. Common Units held by persons other than the Company represented a 3.3% ownership 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 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 connection with each such redemption rather than paying cash (as has been done in all redemptions to date). With each redemption of outstanding Common Units for Company 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.

At December 31, 2005, the Company owned 21,442 apartment units in 58 apartment communities, including 545 apartment units in two communities held in unconsolidated entities and 205 apartment units in one community currently under development. The Company is also developing 145 for-sale condominium homes and is converting 597 apartment units (including 121 units in one community held in an unconsolidated entity) into for-sale condominium homes through a taxable REIT subsidiary. At December 31, 2005, approximately 46.8%, 18.5%, 9.3% and 8.9% (on a unit basis) of the Operating Partnership’s operating communities were located in the Atlanta, Dallas, the greater Washington D.C. and Tampa metropolitan areas, respectively.

Under the provisions of the limited partnership agreement, as amended, Operating Partnership net profits, net losses and cash flow (after allocations to preferred ownership interests) are allocated to the partners in proportion to their common ownership interests. Cash distributions from the Operating Partnership shall be, at a minimum, sufficient to enable the Company to satisfy its annual dividend requirements to maintain its REIT status under the Code.

Basis of presentation

The accompanying consolidated financial statements include the consolidated accounts of the Operating Partnership and its wholly owned subsidiaries. The Operating Partnership also consolidates other entities in which it has a controlling financial interest or entities where it is determined to be the primary beneficiary under Financial Accounting Standards Board Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest Entities.” Under FIN 46R, variable interest entities (“VIEs”) are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. The primary beneficiary is required to consolidate the VIE for financial reporting purposes. The application of FIN 46R requires management to make significant estimates and judgments about the Operating Partnership’s and its other partners’ rights, obligations and economic interests in such entities. For entities in which the Operating Partnership has less than a controlling financial interest or entities where it is not the primary beneficiary under FIN 46R, the entities 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 intercompany accounts and transactions have been eliminated in consolidation. The minority interest of unitholders in the operations of the Operating Partnership is calculated based on the weighted average unit ownership during the period.

Post Apartment Homes, L.P.

POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

In 2005, the Operating Partnership reclassified certain expenses previously reported as general and administrative expenses to property operating and maintenance expenses and investment, development and other expenses on the accompanying statements of operations. Prior period amounts have been reclassified to conform to the 2005 presentation. The reclassified expenses primarily included certain investment group executive and administrative functions and long-term, stock-based compensation and benefits expenses associated with property management and investment and development group activities.

Certain other items in the 2004 and 2003 consolidated financial statements were reclassified for comparative purposes with the 2005 consolidated financial statements.

Cost capitalization

The Operating Partnership capitalizes those expenditures relating to the acquisition of new assets, the development and construction of new apartment and condominium communities, the enhancement of the value of existing assets and those expenditures that substantially extend the life of existing assets. Recurring capital expenditures are expenditures of a type that are expected to be incurred on an annual basis during the life of an apartment community, such as carpet, appliances and flooring. Non-recurring capital expenditures are expenditures that generally occur less frequently than on an annual basis, such as major exterior projects relating to landscaping and structural improvements. Revenue generating capital expenditures are expenditures for the major renovation of communities, the new installation of water sub-metering equipment and other property upgrade costs that enhance the rental value of such communities. 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 their estimated depreciable life). Thereafter, these replacements are capitalized and depreciated. The Operating Partnership expenses as incurred interior and exterior painting of its operating communities.

For communities under development, the Operating Partnership capitalizes interest, real estate taxes, and certain internal personnel and associated costs directly related to apartment and condominium communities under development and construction. Interest is capitalized to projects under development based upon the weighted average cumulative project costs for each month multiplied by the Operating Partnership’s weighted average borrowing costs, expressed as a percentage. Weighted average borrowing costs include the costs of the Operating Partnership’s fixed rate secured and unsecured borrowings and the variable rate unsecured borrowings under its line of credit facilities. The weighted average borrowing costs, expressed as a percentage, for the years ended December 31, 2005, 2004 and 2003 were approximately 6.5%, 7.3% and 7.0%, respectively. Internal personnel and associated costs are capitalized to projects under development based upon the effort identifiable with such projects. The Operating Partnership treats each unit in an apartment community separately for cost accumulation, capitalization and expense recognition purposes. Prior to the completion of rental and condominium units, 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 or sale. This results in a proration of costs between amounts that are capitalized and expensed as the residential units in an apartment development community become available for occupancy. In addition, prior to the completion of rental units, the Operating Partnership expenses as incurred substantially all operating expenses (including pre-opening marketing as well as property management and leasing personnel expenses) of such rental communities. Prior to the completion and closing of condominium units, the Operating Partnership expenses all sales and marketing costs related to such units.

Real estate assets, depreciation and impairment

Post Apartment Homes, L.P.

POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

The Operating Partnership 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. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Factors considered by management in evaluating impairment of its existing real estate assets held for investment 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. Under SFAS No. 144, a real estate asset held for investment is not considered impaired if the undiscounted, estimated future cash flows of an asset (both the annual estimated cash flow from future operations and the estimated cash flow from the theoretical sale of the asset) over its estimated holding period are in excess of the asset’s net book value at the balance sheet date. 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 estimated fair value.

The Operating Partnership periodically classifies real estate assets as held for sale. An asset is classified as held for sale after the approval of the Operating Partnership’s investment committee and after an actual program to sell the asset has commenced. Upon the classification of a real estate asset as held for sale, the carrying value of the asset is reduced to the lower of its net book value or its estimated fair value, less costs to sell the asset. Subsequent to the classification of assets as held for sale, no further depreciation expense is recorded. Real estate assets held for sale are stated separately on the accompanying consolidated balance sheets. The operating results of real estate assets held for sale and sold are reported as discontinued operations in the accompanying statements of operations. Income from discontinued operations includes the revenues and expenses, including depreciation and allocated interest expense, associated with the assets. Interest expense is allocated to assets held for sale based on actual interest costs for assets with secured mortgage debt. Interest expense is allocated to unencumbered assets based on the ratio of unsecured debt to unencumbered assets multiplied by the weighted average interest rate on the Operating Partnership’s unsecured debt for the period and further multiplied by the book value of the assets held for sale and sold. This classification of operating results as discontinued operations applies retroactively for all periods presented. Additionally, gains and losses on assets designated as held for sale are classified as part of discontinued operations.

Revenue recognition

Under the terms of residential leases, the residents of the Operating Partnership’s residential communities are obligated to reimburse the Operating Partnership for certain utility usage, water and electricity (at selected properties), where the Operating Partnership is the primary obligor to the public utility entity. These utility reimbursements from residents are reflected as other property revenues in the consolidated statements of operations.

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, revenues from individual condominium unit sales are recognized upon the closing of the sale transactions (the “Completed Contract Method”), as all conditions for full profit recognition have been met at that time and the conversion construction periods are typically very short. Under SFAS No. 66, the Company uses the relative sales value method to allocate costs and recognize profits from condominium conversion sales. In accordance with SFAS No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets,” gains on sales of condominium units at complete community condominium conversion projects are included in discontinued operations. For condominium conversion projects relating to a portion of an existing apartment community, the Operating Partnership will also recognize revenues and the associated gains under the Completed Contract Method, as discussed herein. Since a portion of an operating community does not meet the requirements of a component of an entity under SFAS No. 144, the revenues and gains on sales of condominium units sold at partial condominium communities will be included in continuing operations.

Post Apartment Homes, L.P.

POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

For newly developed condominiums, the Operating Partnership accounts for each project under either the Completed Contract Method or the “Percentage of Completion Method,” based on a specific evaluation of the factors specified in SFAS No. 66. The factors used to determine the appropriate accounting method are the legal commitment of the purchaser in the real estate contract, whether the construction of the project is beyond a preliminary phase, sufficient units have been contracted to ensure the project will not revert to a rental project, the aggregate project sale proceeds and costs can be reasonably estimated and the buyer has made an adequate initial and continuing cash investment under the contract in accordance with SFAS No. 66. Under the Percentage of Completion Method, revenues and the associated gains are recognized over the project construction period generally based on the percentage of total project costs incurred to estimated total projects costs for each condominium unit under a binding real estate contract.

Long-term ground leases

The Operating Partnership is party to six long-term ground leases associated with land underlying certain of the Operating Partnership’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 Operating Partnership 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.

Apartment community acquisitions

Equity-based compensation

On January 1, 2003, the Operating Partnership elected to voluntarily change its method of accounting for stock-based compensation to the fair value method prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” using the prospective method prescribed in SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” For stock-based compensation granted prior to January 1, 2003, the Operating Partnership accounted for stock-based compensation under the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees.”

Under the prospective method of adoption prescribed by SFAS No. 123 and SFAS No. 148, the Operating Partnership reflects as an expense each period the vested portion of the estimated cost of stock-based compensation, calculated under the Black-Scholes option pricing model for stock options, for all stock-based compensation granted after January 1, 2003. For stock-based compensation granted prior to December 31, 2002, compensation expense was not recognized for stock options granted at the Company’s current stock price on the grant date. As a result, the Operating Partnership’s general and administrative expenses may not be comparable between periods.

Post Apartment Homes, L.P.

POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

The following table reflects the effect on the Operating Partnership’s net income and net income per common unit had the fair value method of accounting under SFAS No. 123 been applied for each year.


	2005			2004			2003
Net income available to common unitholders
As reported	$	141,410		$	81,546		$	3,048
Equity-based compensation included in net income, as reported		2,299			1,785			1,071
Equity-based compensation determined under the fair value method		(2,327	)		(1,853	)		(1,216	)

Pro forma	$	141,382		$	81,478		$	2,903


Net income per common unit- basic
As reported	$	3.34		$	1.92		$	0.07
Pro forma	$	3.34		$	1.92		$	0.07

Net income per common unit- diluted
As reported	$	3.34		$	1.92		$	0.07
Pro forma	$	3.34		$	1.92		$	0.07

Derivative financial instruments

The Operating Partnership accounts for derivative financial instruments at fair value under the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended. The Operating Partnership uses derivative financial instruments, interest rate swap and interest rate cap arrangements, to manage or hedge its exposure to interest rate changes. The Operating Partnership designates each derivative instrument as a hedge of specific interest expense cash flow exposure. Under SFAS 133, as amended, derivative instruments qualifying as hedges of specific cash flows are recorded on the balance sheet at fair value with an offsetting increase or decrease to accumulated other comprehensive income, a partners’ equity account, until the hedged transactions are recognized in earnings. Periodically, the Operating Partnership evaluates the effectiveness of its cash flow hedges. Any ineffective portion of cash flow hedges are recognized immediately in earnings.

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

Deferred financing costs

Deferred financing costs are amortized using the straight-line method, which approximates the interest method, over the terms of the related debt.

Per unit data

The Operating Partnership reports both basic and diluted earnings per unit amounts. Basic earnings per common unit is computed by dividing net income available to common unitholders by the weighted average number of common units outstanding during the year. Diluted earnings per common unit is computed by dividing net income available to common unitholders by the weighted average number of common units and common unit equivalents outstanding during the year, which are computed using the treasury stock method for outstanding stock options. Common unit equivalents are excluded from the computations in years in which they have an anti-dilutive effect.

Post Apartment Homes, L.P.

POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

Use of estimates

New accounting pronouncements

In 2005 and 2004, several new accounting pronouncements were issued and the pronouncements with a potential impact on the Operating Partnership in 2005 and in future periods are discussed below.

SFAS No. 123R, “Share-Based Payment”, was issued in December 2004. SFAS No. 123R revised 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 superseded the provisions of APB No. 25. The provisions of SFAS No. 123R were effective on January 1, 2006. The Operating Partnership adopted SFAS No. 123R on January 1, 2006 using the modified prospective method of adoption. Since the Operating Partnership elected to apply the provisions of SFAS No. 123 on January 1, 2003, the adoption of SFAS No. 123R will not have a significant impact on the Operating Partnership’s financial position or results of operations.

FASB Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations” was issued in March 2005. FIN 47 is an interpretation of SFAS No. 143, “Accounting for Asset Retirement Obligations,” and addressed liability recognition issues under SFAS No. 143 related to the timing and/or method of settlement of retirement obligations that are conditional on future events. FIN 47 was effective as of December 31, 2005. The Operating Partnership has assessed the impact of FIN 47 and has determined that the provisions of FIN 47 did not have a material impact on the Operating Partnership’s financial position or results of operations at December 31, 2005. The application of FIN 47 requires significant management estimates and judgments regarding the impact of future events. Management believes it has applied reasonable judgments and estimates in reaching its determination.

The Emerging Issues Task Force issued EITF No. 04-05 (“EITF No. 04-05”), “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights”. EITF No. 04-05 provides a framework for evaluating whether a general partner or group of general partners or managing members controls a limited partnership or limited liability company and therefore should consolidate the entity. The presumption that the general partner or group of general partners or managing members controls a limited liability partnership or limited liability company may be overcome if the limited partners or members have (1) the substantive ability to dissolve the partnership without cause, or (2) substantive participating rights. EITF No. 04-05 became effective on June 30, 2005 for new or modified limited partnerships or limited liability companies and January 1, 2006 for all existing arrangements. The Operating Partnership does not believe that the adoption of EITF No. 04-05 will have a material impact on the Operating Partnership’s financial position or results of operations.

2. DEFERRED CHARGES

Deferred charges consist of the following:


	December 31,
	2005			2004
Deferred financing costs	$	26,050		$	33,542
Other		5,399			4,350

		31,449			37,892

Less: accumulated amortization		(19,825	)		(22,318	)

	$	11,624		$	15,574

Post Apartment Homes, L.P.

POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data

3. INDEBTEDNESS

At December 31, 2005 and 2004, the Operating Partnership’s indebtedness consisted of the following:


							December 31,
	Payment	Interest			Maturity
Description	Terms	Rate			Date		2005		2004
Unsecured Notes
Senior Notes	Int.		5.125% - 7.70	%		2006-2012	$	485,000	$	385,000
Medium Term Notes	Int.		—			—		—		212,043

								485,000		597,043


Unsecured Lines of Credit
Syndicated Line of Credit	N/A	LIBOR + 0.75		%(1)		2007		90,000		40,000
Cash Management Line	N/A	LIBOR + 0.75		%		2007		11,379		10,748

								101,379		50,748


Conventional Fixed Rate (Secured)
FNMA	Prin. and Int.		6.975	%(2)		2029		97,100		98,500
Other	Prin. and Int.		4.27% - 7.69	%		2007-2013		268,641		273,132

								365,741		371,632


Tax Exempt Floating Rate Bonds (Secured)	Int.		3.54	%(3)		2025		28,495		110,055


Total							$	980,615	$	1,129,478


(1)		Represents stated rate. At December 31, 2005, the weighted average interest rate was 4.75%.

(2)		Interest rate is fixed at 6.975%, inclusive of credit enhancement and other fees, to 2009 through an interest rate swap arrangement.

(3)		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 the rate at December 31, 2005 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%. At December 31, 2005 and 2004, approximately $0 and $34,060, respectively, of this debt was secured by assets held for sale. In June 2005, the Operating Partnership executed an amendment to its master reimbursement agreement with FNMA, which agreement, among other things, sets forth the Operating Partnership’s payment obligations under its variable-rate, tax-exempt bond indebtedness. The amendment deferred the commencement of principal repayments under the bonds by five years from the originally scheduled commencement date. The original maturity date for the bonds remains unchanged and the amortization schedule of the bonds was changed commensurate with the five-year deferral of the start of principal amortization.

Debt maturities

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


2006	$	81,269
2007		259,572	(1)
2008		4,557
2009		75,901
2010		188,267
Thereafter		371,049

	$	980,615


(1)		Includes outstanding balance on lines of credit totaling $101,379.

Debt issuances, retirements and modifications

2005

Upon their maturity in 2005, the Operating Partnership repaid its $25,000 (7.28%) medium term, unsecured notes, repaid its $100,000 (6.85%) Mandatory Par Put Remarketed Securities (“MOPPRS”) debt arrangement, repaid its $62,043 (8.125%) medium term, unsecured notes and repaid its $25,000 (6.78%) medium term, unsecured notes, from available borrowings under its unsecured lines of credit.

In 2005, the Operating Partnership issued $100,000 of senior unsecured notes. The notes bear interest at 5.45% and mature in 2012. The net proceeds from the unsecured notes were used to reduce amounts outstanding under the Operating Partnership’s unsecured lines of credit.

The Operating Partnership sold three apartment communities subject to the assumption of $81,560 of tax-exempt mortgage indebtedness (see note 5). As a result of these debt assumptions, the Operating Partnership recorded losses on the early extinguishment of debt of $3,220 related to the write-off of deferred loan costs of $2,264 relating to such assumed

Post Apartment Homes, L.P.

POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

indebtedness and the realization of a $955 loss in connection with the termination of related interest rate cap agreements that were used as cash flow hedges of the assumed debt.

2004

In the fourth quarter of 2004, the Operating Partnership issued $100,000 of senior unsecured notes. The notes bear interest at 5.125% and mature in 2011. The net proceeds from the unsecured notes were used to reduce amounts outstanding under the Operating Partnership’s unsecured lines of credit. In 2004, the Operating Partnership also closed a $35,000 secured, fixed rate mortgage note payable in a consolidated real estate entity. The note bears interest at 4.27%, requires monthly interest only payments through March 2007 and monthly principal and interest payments based on a 30-year amortization schedule from April 2007 through the note maturity date in March 2009.

In the fourth quarter of 2004, the Operating Partnership purchased and retired $87,957 of the Operating Partnership’s 8.125% medium term, unsecured notes through a tender offer using available borrowings under its unsecured lines of credit. Subsequent to the debt retirement, $62,043 of the 8.125% medium term notes remained outstanding until their maturity in 2005. As part of this transaction, the Operating Partnership recorded a loss on the early extinguishment of this indebtedness of $4,011 representing the debt repurchase premiums, the expenses of the tender offer and the write-off of the unamortized deferred financing costs associated with the retired indebtedness.

In the fourth quarter of 2004, the Operating Partnership terminated a remarketing agreement related to its $100,000, 6.85% Mandatory Par Put Remarketed Securities (“MOPPRS”). In connection with the termination of the remarketing agreement, the Operating Partnership paid $10,615 (interest expense), including transaction expenses. Under the provisions of the remarketing agreement, the remarketing agent had the right to remarket the $100,000 unsecured notes in 2005 for a ten-year term at an interest rate calculated as 5.715% plus the Operating Partnership’s then current credit spread to the ten-year treasury rate. As a result of the termination of the remarketing agreement, the underlying debt matured and was repaid in 2005.

Upon their maturity in 2004, the Operating Partnership repaid its $13,000 (7.30%) medium term, unsecured notes and repaid its $10,000 (6.69%) medium term, unsecured notes, from available borrowings under its unsecured lines of credit.

The Operating Partnership sold certain apartment communities subject to the assumption of $104,325 of tax-exempt mortgage indebtedness (see note 5). As a result of this debt assumption, the Operating Partnership recorded a loss on early extinguishment of indebtedness of $4,128 related to the write-off of unamortized deferred financing costs of $3,187 relating to such assumed indebtedness and the realization of a $941 loss in connection with the termination of related interest rate cap agreements that were used as cash flow hedges of the assumed debt.

In conjunction with an apartment community acquisition (see note 5) in 2004, the Operating Partnership assumed a secured, fixed rate mortgage note payable. The mortgage note was valued at $49,496 yielding an effective rate of 4.7%. The mortgage note bears interest at a coupon rate of 6.8%, requires monthly principal and interest payments and matures in 2007.

Unsecured lines of credit

The Operating Partnership 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 Operating Partnership’s senior unsecured debt. The rates under the Revolver are based on the higher of the Operating Partnership’s unsecured debt ratings in instances where the Operating Partnership 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

Post Apartment Homes, L.P.

POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

allow the Operating Partnership to make distributions necessary to allow the Company to maintain its status as a REIT. The Operating Partnership 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 December 31, 2005, the Operating Partnership had issued letters of credit to third parties totaling $3,136 under this facility.

Additionally, the Operating Partnership 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.

Interest paid

Pledged assets

The aggregate net book value at December 31, 2005 of property pledged as collateral for indebtedness amounted to approximately $465,420.

4. INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ENTITIES

At December 31, 2005, the Operating Partnership holds investments in three individual limited liability companies (the “Property LLCs”) with an institutional investor. Two of the Property LLCs own single apartment communities. The third Property LLC is converting its apartment community, containing 121 units, into for-sale condominiums. The Operating Partnership holds a 35% equity interest in the Property LLCs.

The Operating Partnership accounts for its investments in these Property LLCs using the equity method of accounting. Under FIN 46R, the Operating Partnership concluded the Property LLCs were not VIEs and therefore, did not require consolidation. The excess of the Operating Partnership’s investment over its equity in the underlying net assets of the Property LLCs was approximately $6,099 at December 31, 2005. The excess investment related to 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 approximately $611 at December 31, 2005 related to the Property LLC holding the condominium conversion community will be recognized as additional costs as the underlying condominiums are sold. The Operating Partnership provides real estate services (development, construction and property management) to the Property LLCs for which it earns fees.

In June 2003, the underlying apartment community held by a fourth Property LLC was sold. The financial information below for the year ended December 31, 2003 reflects the gain on property sale of $26,179 and the operating results of this Property LLC as discontinued operations through the sale date. The Operating Partnership’s share of this gain of $8,395 is included in the Operating Partnership’s share of net income (loss) shown in the table below.

Post Apartment Homes, L.P.

POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

The operating results of the Operating Partnership include its allocable 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:


	December 31,
Balance Sheet Data	2005		2004
Real estate assets, net of accumulated depreciation of $8,349 and $9,712, respectively	$	96,000	$	124,072
Assets held for sale, net		17,715		—
Cash and other		1,770		2,797

Total assets	$	115,485	$	126,869

Mortgage notes payable	$	66,999	$	83,468
Mortgage notes payable to Operating Partnership		5,967		—
Other liabilities		996		1,296

Total liabilities		73,962		84,764
Members’ equity		41,523		42,105

Total liabilities and members’ equity	$	115,485	$	126,869

Operating Partnership’s equity investment	$	20,647	$	21,320


	Year ended December 31,
Income Statement Data	2005			2004			2003
Revenues
Rental	$	10,789		$	10,451		$	6,757
Other		840			776			392

Total revenues		11,629			11,227			7,149

Expenses
Property operating and maintenance		3,689			3,555			3,416
Depreciation and amortization		2,621			2,579			2,481
Interest		2,752			2,658			2,338

Total expenses		9,062			8,792			8,235

Income (loss) from continuing operations		2,567			2,435			(1,086	)

Discontinued Operations
Loss from discontinued operations		(176	)		(355	)		(683	)
Gain on sales of real estate assets		2,834			—			26,179
Loss on early extinguishment of debt		(273	)		—			—

Income (loss) from discontinued operations		2,385			(355	)		25,496


Net income	$	4,952		$	2,080		$	24,410


Operating Partnership’s share of net income	$	1,767		$	1,083		$	7,790

In early 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 Operating Partnership. 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 Operating Partnership has a fixed rate component ($16,392) bearing interest at 4.28% and a variable rate component bearing interest at LIBOR at 1.90%. This note is repayable from the proceeds of condominium sales and matures in February 2008.

Post Apartment Homes, L.P.

POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

5. REAL ESTATE ACQUISITIONS AND DISPOSITIONS

Acquisitions

In June 2005, the Operating Partnership 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, through December 31, 2005, the Operating Partnership had incurred additional costs of approximately $1,000, of an estimated cost of approximately $1,100 to improve the community. The purchase price of this community was allocated to the assets acquired based on their estimated fair values.

In June 2004, the Operating Partnership acquired a 499-unit apartment community located in suburban Washington, D.C. for approximately $85,814, including the assumption of mortgage indebtedness and closing costs. Additionally, the Operating Partnership incurred additional costs of approximately $2,000, to improve the community. The assumed mortgage note payable was valued at $49,496 yielding an effective interest rate of 4.7%. The mortgage note bears interest at a coupon rate of 6.8%, requires monthly principal and interest payments and matures in 2007. The purchase of this community was allocated to the assets acquired and the liabilities assumed based on their estimated fair values.

Subsequent to December 31, 2005, the Operating Partnership acquired two apartment communities, containing 308 units in Austin, Texas for approximately $46,500, including estimated closing costs.

Dispositions

The Operating Partnership classifies real estate assets as held for sale after the approval of its investment committee and after the Operating Partnership has commenced an active program to sell the assets. At December 31, 2005, the Operating Partnership had one community, originally containing 127 units, that is being converted into condominiums classified as held for sale. This real estate asset is classified separately in the accompanying consolidated balance sheet at $4,591, which represented its remaining net book value. The Operating Partnership expects to complete the sale of all condominiums at this community in the next twelve months.

In the fourth quarter of 2005, the Operating Partnership began the conversion of portions of two apartment communities into for-sale condominiums. Under SFAS No. 144, the operating results and future sales activities of these condominium units will be reflected in continuing operations. In addition, the net book value of the assets being converted into condominiums were reflected separately on the consolidated balance sheet under the caption titled “For-sale condominiums.”

The revenues and expenses of these communities for the years ended December 31, 2005, 2004 and 2003 were as follows:


	2005		2004			2003
Revenues
Rental	$	27,967	$	56,411		$	83,352
Other		2,805		5,077			6,590

Total revenues		30,772		61,488			89,942

Expenses
Property operating and maintenance (exclusive of items shown separately below)		13,136		25,411			35,687
Depreciation		5,813		11,645			18,144
Interest		5,421		9,321			12,551
Asset impairment charges		—		2,233			17,462
Minority interest in consolidated property partnerships		14		(238	)		(419	)

Total expenses		24,384		48,372			83,425

Income from discontinued operations	$	6,388	$	13,116		$	6,517

Post Apartment Homes, L.P.

POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

In 2004, the Operating Partnership recorded asset impairment charges totaling $2,233 to write-down the cost of two apartment communities, located in Dallas, Texas, to their estimated fair value when the assets were classified as held for sale or sold. In 2003, the Operating Partnership recorded asset impairment charges totaling $17,462 to write-down apartment communities in Dallas, Texas and Phoenix, Arizona to their estimated fair value.

For the year ended December 31, 2005, the Operating Partnership recognized net gains in discontinued operations of $124,425 from the sale of six communities, containing 3,047 units. The sales generated net proceeds of approximately $229,249, including $81,560 of tax-exempt secured indebtedness assumed by the purchasers.

In addition, for the year ended December 31, 2005, gains on sales of real estate assets included net gains of $16,812 from condominium sales at the Operating Partnership’s condominium conversion communities reported in discontinued operations. A summary of revenues and costs and expenses of these condominium activities for the year ended December 31, 2005 was as follows:


	2005
Condominium revenues, net	$	51,857
Condominium costs and expenses		(35,045	)

Gains on condominium sales, before minority interest and income taxes		16,812
Provision for income taxes		(594	)

Gains on condominium sales, net of minority interest and provision for income taxes	$	16,218

For the year ended December 31, 2004, the Operating Partnership recognized net gains from discontinued operations of $113,739 from the sale of eight communities, containing 3,880 units, and certain land parcels. These sales generated net proceeds of approximately $242,962, including $104,325 of tax-exempt debt assumed by the purchasers. For the year ended December 31, 2003, the Operating Partnership recognized net gains from discontinued operations of $40,792 on the sale of four communities, containing 1,844 units, and certain land parcels. These sales generated net proceeds of approximately $163,560.

In January 2006, the Operating Partnership designated one apartment community, containing 696 units, as held for sale. The aggregate net book value of this asset totaled approximately $88,000, which represented the lower of depreciated cost or estimated fair value, less costs to sell, of the assets. In September 2006, the Operating Partnership designated three additional apartment communities, containing 826 units, as held for sale. The aggregate net book value of these assets totaled approximately $22,600, which represented the lower of depreciated cost or estimated fair value, less costs to sell, of the assets. One of the communities was encumbered by an $18,600 tax exempt mortgage note payable.

6. PARTNERS’ EQUITY

Common and Preferred Units

At December 31, 2005 and 2004, the Operating Partnership had outstanding Common Units totaling 42,796 and 42,663, respectively. At December 31, 2005, the Operating Partnership had outstanding two 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.

The Operating Partnership has outstanding 900,000, 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 also 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

Post Apartment Homes, L.P.

POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

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.

In 2004, the Company redeemed its 7.625% Series C cumulative redeemable preferred stock. Correspondingly, the Operating Partnership redeemed its Series C Preferred Units on the same date and under the same terms. The redemption price was $25.00 per unit, plus accrued and unpaid distributions through the redemption date. In connection with the issuance of the Series C Preferred Units in 1998, the Operating Partnership incurred $1,716 in issuance costs and recorded such costs as a reduction of partners’ equity. The redemption price of the Series C Preferred Units exceeds the related carrying value by the $1,716 of issuance costs. In connection with the redemption, in accordance with generally accepted accounting principles, the Operating Partnership reflected the $1,716 of issuance costs as a reduction of earnings in arriving at net income available to common unitholders in 2004.

In 2004, the Operating Partnership also redeemed its 8.0% Series D cumulative redeemable preferred units (“Series D Preferred Units”) for $25.00 per unit (an aggregate of $70,000), plus accrued and unpaid distributions through the redemption date. In connection with the issuance of the Series D Preferred Units in 1998, the Operating Partnership incurred $1,810 in issuance costs and recorded such costs as a reduction of partners’ equity. The redemption price of the Series D Preferred Units exceeded the related carrying value by the $1,810 of issuance costs. In connection with the redemption, in accordance with generally accepted accounting principles, the Operating Partnership reflected the $1,810 of issuance costs as a reduction of earnings in arriving at net income available to common unitholders in 2004.

Common Unit Purchases

In 2005, the Company repurchased approximately 1,031 shares of its common stock at an aggregate cost of $34,400 under 10b5-1 stock purchase plans. 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. In 2004, under a previous stock repurchase program, the Company repurchased $2,268 of common stock and $120,000 of preferred stock and units. Correspondingly, the Operating Partnership repurchased the same number and amount of common and preferred units from the Company.

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POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

Computation of Earnings per Common Unit

For the years ended December 31, 2005, 2004 and 2003, basic and diluted earnings per Common Unit for income (loss) from continuing operations available to common unitholders, before cumulative effect of accounting change, has been computed as follows:


	Year ended December 31, 2005
	Income			Units			Per-Unit
	(Numerator)			(Denominator)			Amount
Income from continuing operations	$	5,236
Less: Preferred Unit distributions		(7,637	)

Basic EPU
Loss from continuing operations available to common unitholders		(2,401	)		42,353		$	(0.06	)

Effect of dilutive securities
Stock options		—			—	(1)

Diluted EPU
Loss from continuing operations available to common unitholders	$	(2,401	)		42,353		$	(0.06	)


	Year ended December 31, 2004
	Income			Units		Per-Unit
	(Numerator)			(Denominator)		Amount
Loss from continuing operations	$	(25,550	)
Less: Preferred Unit distributions		(12,105	)
Less: Redemption costs on preferred units		(3,526	)

Basic EPU
Loss from continuing operations available to common unitholders		(41,181	)		42,474	$	(0.97	)

Effect of dilutive securities
Stock options		—			—

Diluted EPU
Loss from continuing operations available to common unitholders	$	(41,181	)		42,474	$	(0.97	)


	Year ended December 31, 2003
	Income			Units		Per-Unit
	(Numerator)			(Denominator)		Amount
Loss from continuing operations	$	(27,212	)
Less: Preferred unit distributions		(17,049	)

Basic EPU
Loss from continuing operations available to common unitholders		(44,261	)		42,134	$	(1.05	)

Effect of dilutive securities
Stock options		—			—

Diluted EPU
Loss from continuing operations available to common unitholders	$	(44,261	)		42,134	$	(1.05	)


(1)		For the years ended December 31, 2005, 2004 and 2003, the potential dilution from the Company’s outstanding stock options of 400, 115 and 11, respectively, was antidilutive to the loss from continuing operations per unit calculation. As such, these amounts were excluded from weighted average units in these years.

In 2005, 2004 and 2003, stock options to purchase 3,534, 4,491 and 4,735 shares of common stock, respectively, were excluded from the computation of diluted earnings per unit as these options were antidilutive.

7. SEVERANCE AND PROXY CONTEST CHARGES

In 2005, the Operating Partnership recorded an additional expense charge of $796 relating to changes in the estimated future costs of certain benefits granted to former executive officers under prior employment or settlement agreements (see discussion below). The estimated future cost increases primarily related to increased fuel and other operating costs and expenses associated with certain fractional aircraft benefits provided to such executives.

In 2003, the Operating Partnership recorded charges totaling $21,506 relating to the change in roles from executive to non-executive status of the Company’s former chairman and vice-chairman of the board of directors and relating to the departures of its executive vice president and chief financial officer and its executive vice president of asset management. These charges

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100

POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

consisted of amounts representing the discounted present value of the estimated payments to be made to the former chairman and vice-chairman under their existing employment arrangements, amounts representing the discounted present value of estimated net costs to be incurred by the Operating Partnership relating to its split-dollar life insurance obligations to the individuals under their employment contracts and amounts representing the aggregate amount of the estimated payments and benefits to be made to the other departing executive officers. In 2004, the Operating Partnership entered into a final settlement agreement with its former chairman of the board of directors. Under the terms of the agreement, the former chairman’s employment and non-competition agreements were terminated and the Operating Partnership agreed to continue to provide the former chairman certain payments and benefits through 2013, the approximate expiration date of the original employment agreement. Because the present value of the estimated payments under the settlement agreement approximated the Operating Partnership’s remaining accrued charge under the former employment agreement, no additional charges were recorded in 2004 as a result of the settlement.

The following table summarizes the activity relating to the accrued severance charges for the years ended December 31, 2005, 2004 and 2003:


	2005			2004			2003
Accrued severance charges, beginning of year	$	15,317		$	19,171		$	—
Severance charges		796			—			21,506
Payments for period		(2,694	)		(4,858	)		(3,237	)
Interest accretion		906			1,004			902

Accrued severance charges, end of year	$	14,325		$	15,317		$	19,171

Substantially all of these remaining amounts will be paid over the remaining terms of the former executives’ employment and settlement agreements (8 to 11 years).

In 2003, proxy and related costs of $5,231 represented the legal, advisory and other expenses associated with the solicitation of proxies from partners resulting from the proxy contest initiated in April 2003 by the Company’s former chairman of the board of directors. Additionally, the $5,231 amount included the estimated legal and resolution costs associated with the settlement of two derivative and purported class action lawsuits filed against the Operating Partnership during the proxy contest. These lawsuits were settled in October 2004 (see note 11).

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 requirements.

As of December 31, 2005, 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 Operating Partnership’s consolidated financial statements by $50,803.

Taxable REIT subsidiaries

The Operating Partnership utilizes taxable REIT subsidiaries (“TRSs”) to perform such non-REIT activities as asset and property management, for-sale housing (condominiums) conversions and sales and other services for third parties. These TRSs are subject to federal and state income taxes. The components of income tax expense, significant deferred tax assets

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101

POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

and liabilities and a reconciliation of the TRS income tax expense to the statutory federal rate are reflected in the tables below. For the years ended December 31, 2004 and 2003, the impact of TRSs’ income taxes and their related tax attributes were not material to the accompanying consolidated financial statements.

Income tax expense of the TRSs for the year ended December 31, 2005 is comprised of the following:


	2005
Current tax expense
Federal	$	251
State		343

		594

Deferred tax expense
Federal		—
State		—

		—

Total income tax expense		594
Income tax expense — discontinued operations		(594	)

Income tax expense — continuing operations	$	—

The components of the TRSs’ deferred income tax assets and liabilities at December 31, 2005 and 2004 were as follows:


	2005			2004
Deferred tax assets
Real estate asset basis differences	$	1,106		$	1,106
Tax NOLs		415			3,300
Accrued liabilities		641			—
Other		269			769

		2,431			5,175

Deferred tax liabilities
Amortization		(797	)		(824	)

		(797	)		(824	)

Net deferred tax assets, before valuation allowances		1,634			4,351
Valuation allowances		(1,634	)		(4,351	)

Net deferred tax assets (liabilities)	$	—		$	—

At December 31, 2005, the Operating Partnership’s taxable REIT subsidiaries had consolidated federal income tax net operating loss carryforwards totaling approximately $1,200. These tax loss carryforwards begin to expire in 2021. At December 31, 2005 and 2004, management had established valuation allowances against the deferred tax asset associated with these net operating loss carryforwards and other net deferred tax assets due primarily to the historical losses and variability of the income of these subsidiaries. The tax benefits associated with such valuation allowances may be recognized in future periods, if the taxable REIT subsidiaries generate sufficient taxable income to utilize such amounts or if the Operating Partnership determines that it is more likely than not that the related deferred tax assets are realizable.

A reconciliation of income tax expense of the TRSs to the federal statutory rate is detailed below. As shown above, 2005 income tax expense was allocated to discontinued operations.


	2005
Federal tax rate		35	%
State income tax, net of federal benefit		4	%
Federal alternative minimum taxes		3	%
Change in valuation allowance of deferred tax assets		(35	)%

		7	%

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102

POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

9. EQUITY-BASED COMPENSATION PLANS

Equity Compensation Plans

As the primary operating subsidiary of the Company, the Operating Partnership participates in and bears the compensation expenses associated with the Company’s stock-based compensation plans. The information discussed below relating to the Company’s stock-based compensation plans is also applicable for the Operating Partnership. Effective January 1, 2003, the Operating Partnership elected to voluntarily change its method of accounting for equity-based compensation to the fair value method prescribed in SFAS No. 123 (see note 1). The Operating Partnership elected the prospective method of adoption prescribed by SFAS No. 148. For equity-based compensation granted prior to January 1, 2003, the Operating Partnership accounted for equity-based compensation under the intrinsic value method prescribed by APB No. 25. A table in note 1 summarizes the Operating Partnership’s net income and earnings per common unit had the fair value method of accounting under SFAS No. 123 been applied for the years ended December 31, 2005, 2004 and 2003.

Incentive Stock Plans

In 2005, 2004 and 2003, the Company granted stock options to purchase 277, 283 and 1,252 shares of Company common stock to Company officers and directors, of which 50, 50 and 100 shares in 2005, 2004 and 2003, respectively, were granted to the Company’s non-executive chairman of the board. For the years ended December 31, 2005, 2004 and 2003, the Company recorded compensation expense related to stock options of $761, $590 and $244, respectively, recognized under the fair value method.

The following table summarizes the weighted average assumptions used in the calculation of the fair value of stock options granted using the Black-Scholes option-pricing model.


	2005			2004			2003
Dividend yield		5.5	%		6.3	%		6.5	%
Expected volatility		17.1	%		16.9	%		17.1	%
Risk-free interest rate		3.1	%		3.1	%		2.9	%
Expected option life	5 years			5 years			5 years

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POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

A summary of stock option activity under all plans for the years ended December 31, 2005, 2004 and 2003, is presented below.


	2005					2004					2003
				Weighted					Weighted					Weighted
				Average					Average					Average
	Shares			Exercise Price		Shares			Exercise Price		Shares			Exercise Price
Outstanding at beginning of year		4,491		$	33		4,735		$	34		4,089		$	35
Granted		277			33		283			28		1,252			26
Exercised		(1,105	)		33		(277	)		29		(217	)		28
Forfeited		(129	)		30		(250	)		36		(389	)		32

Outstanding at end of year		3,534			34		4,491			33		4,735			34

Options exercisable at year-end		2,437					3,131					3,233

Weighted-average fair value of options granted during the year	$	2.73				$	1.86				$	1.59

At December 31, 2005, the Company has separated its outstanding options into two ranges based on exercise prices. There were 1,481 options outstanding with exercise prices ranging from $23.90 to $35.51. These options have a weighted average exercise price of $27.75 and a weighted average remaining contractual life of 8 years. Of these outstanding options, 457 were exercisable at December 31, 2005 at a weighted average exercise price of $26.66. In addition, there were 2,053 options outstanding with exercise prices ranging from $36.13 to $44.13. These options have a weighted average exercise price of $38.16 and a weighted average remaining contractual life of 3 years. Of these outstanding options, 1,980 were exercisable at December 31, 2005 at a weighted average exercise price of $37.56.

In 2005, 2004 and 2003, the Company granted 35, 27 and 175 shares of restricted stock, respectively, to Company officers and directors, of which 6, 7 and 8 shares in 2005, 2004 and 2003, respectively, were granted to the Company’s non-executive chairman of the board. The restricted shares granted in 2005 and 2004 vest ratably over three to five year periods. The restricted shares granted in 2003 vest ratably over three to eight year periods. For each year, the total value of the restricted share grants of $1,173, $777 and $4,555, respectively, was initially reflected in partners’ equity as additional paid-in capital and as deferred compensation, a contra-partners’ equity account. Such deferred compensation is amortized ratably into compensation expense over the applicable vesting period. Total compensation expense relating to the restricted stock was $1,367, $1,109 and $742 in 2005, 2004 and 2003, respectively.

Employee Stock Purchase Plan

Effective January 1, 2003, under SFAS No. 123, the Operating Partnership records the aggregate cost of the ESPP (generally the 15% discount on the share purchases) as a period expense. Total compensation expense relating to the ESPP was $171, $86 and $85 in 2005, 2004 and 2003, respectively.

10. EMPLOYEE BENEFIT PLAN

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 5% (4% in 2004 and 2003) of salary. Operating Partnership contributions of $691, $541 and $513 were made to this plan in 2005, 2003 and 2003, respectively.

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POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

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 and four ground leases expiring in 2012, 2038, 2066 and 2074 for four separate operating communities and to other facility, office, equipment and other operating leases with terms expiring through 2057. 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. Future minimum lease payments for non-cancelable land, office, equipment and other leases at December 31, 2005, are as follows:


2006	$	1,665
2007		1,625
2008		1,638
2009		1,628
2010		1,634
2011 and thereafter		167,857

The Operating Partnership incurred $5,058, $4,981 and $4,382 of rent expense, including rent expense under short-term rental and lease arrangements, for the years ended December 31, 2005, 2004 and 2003, respectively.

Legal proceedings

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POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

The Company is involved in various other legal proceedings incidental to its business from time to time, most of which are expected to be covered by liability or other insurance. Management of the Company believes that any resolution of pending proceedings or liability to the Company which may arise as a result of these proceedings will not have a material adverse effect on the Company’s results of operations or financial position.

12. RELATED PARTY TRANSACTIONS

In 2005, 2004 and 2003, the Operating Partnership held investments in Property LLC’s accounted for under the equity method of accounting (see note 4). In 2005, 2004 and 2003, the Operating Partnership recorded, before elimination of the Operating Partnership’s equity interests, development fees, general construction contract billings, management fees and expense reimbursements (primarily personnel costs) of approximately $1,781, $1,756 and $2,913, respectively, from these related companies. Additionally in 2005, 2004 and 2003, the Operating Partnership earned interest under mortgage and construction loans to the Project LLCs totaling $437, $308 and $3,186, respectively. The Operating Partnership portion of all significant intercompany transactions was eliminated in the accompanying consolidated financial statements.

In prior years, the Operating Partnership provided landscaping services for executive officers, employees, directors and other related parties. For the year ended December 31, 2003, the Operating Partnership received landscaping revenue of $742 for such services. Such revenue includes reimbursement of direct and indirect expenses.

At December 31, 2005 and 2004, the Operating Partnership had outstanding loan balances to certain current and former Operating Partnership executives totaling $2,485 and $5,095, respectively. These loans mature ten years from their 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. Additionally, at December 31, 2005 and 2004, the Operating Partnership had outstanding additional loans to certain Operating Partnership executives totaling $640 and $780, respectively. 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 $140, $140 and $160 was recorded as compensation expense in 2005, 2004 and 2003, respectively.

13. DERIVATIVE FINANCIAL INSTRUMENTS

At December 31, 2005, the Operating Partnership had outstanding one interest rate swap agreement with a notional value of approximately $97,100 with a maturity date in 2009. At December 31, 2004, the Operating Partnership had interest rate swaps with notional values of $123,000. At December 31, 2005 and 2004, the fair value of the interest rate swap agreements represented liabilities of $4,021 and $8,927, respectively, and the liabilities were included in consolidated liabilities in the accompanying consolidated balance sheets. The Operating Partnership recorded the changes in the fair value of these cash flow hedges as changes in accumulated other comprehensive income (loss), a partners’ equity account, in the accompanying consolidated balance sheet.

At December 31, 2005, the Operating Partnership had outstanding one interest rate cap agreement with a financial institution with a notional value of $28,495. This interest rate cap agreement is cash flow hedge that provides a fixed interest ceiling at 5% for the Operating Partnership’s variable rate, tax-exempt borrowings aggregating $28,495 at December 31, 2005. The Operating Partnership is required to maintain the interest rate exposure protection under the terms of the financing arrangements. The interest rate cap arrangements are included on the accompanying balance sheet at fair value. At December 31, 2005, the difference between the amortized costs of the interest rate cap arrangement and their fair value of $5 is included in accumulated other comprehensive income (loss), a partners’ equity account. The original cost of $362 of the arrangements is being amortized to expense over their five-year term.

In 2005, in connection with the sale of three communities discussed in note 5 above, the Operating Partnership sold its interest in interest rate cap agreements with notional values of $81,560 for aggregate proceeds of $17 and realized losses of $955 that were included in the loss on early extinguishment of indebtedness associated with asset sales on the accompanying statement of operations. In 2004, in connection with the sale of five communities discussed in note 5 above, the Operating Partnership sold its interest in interest rate cap agreements with notional values of $104,325 for aggregate proceeds of $379 and realized losses of $941 that was included in the loss on early extinguishment of indebtedness associated with asset sales on the accompanying statement of operations. The unrealized losses on these interest rate cap agreements were previously reflected in accumulated other comprehensive income (loss), a partner’s equity account. These interest rate cap agreements were sold and the underlying hedged indebtedness was assumed by the purchasers in connection with the sale of the related assets.

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106

POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

The impact of the change in the value of the derivatives on comprehensive income (loss) is included in the statement of partners’ equity. Amounts reported in accumulated other comprehensive income related to these derivatives will be reclassified to interest expense as schedule interest payments are made on the Company’s hedge indebtedness. At December 31, 2005, the Operating Partnership estimates that $1,470 will be reclassified from accumulated other comprehensive income as an increase in interest expense during the next twelve months.

14. 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.

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, 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, as amended. At December 31, 2005, the carrying amounts of the interest rate swap arrangement represented a net liability totaling $4,021 and the carrying value of the interest rate cap arrangement represented a net asset of $5. At December 31, 2004, the carrying amounts of the interest rate swap arrangements represented net liabilities totaling $8,927 and the carrying value of the interest rate cap arrangements represented net assets of $110.

15. 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 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. 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 and other ancillary service and support operations are combined in the line item “other property segments” in the accompanying segment information. The segment information presented below reflects the segment categories based on the lifecycle status of each community as of December 31, 2005. The segment information for the years ended December 31, 2004 and 2003 have been adjusted due to the restatement impact of reclassifying the operating results of the assets designated as held for sale in 2005 and 2006 to discontinued operations under SFAS No. 144 (see note 5).

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POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

	•		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 prior year – communities which reached stabilized occupancy in the prior year.

	•		Condominium conversion communities – those portions of existing apartment communities being converted into condominiums that are reflected in continuing operations under SFAS No. 144 (see note 1).

	•		Acquired communities – those communities acquired in the current or prior year.

Segment Performance Measure

Segment Information

The following table reflects each segment’s contribution to consolidated revenues and NOI together with a reconciliation of segment contribution to NOI to consolidated net income for the years ended December 31, 2005, 2004 and 2003. 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 is not reported internally at the segment level.


	Year ended December 31,
	2005			2004			2003
Revenues
Fully stabilized communities	$	234,803		$	227,823		$	224,757
Communities stabilized during prior year		7,184			7,007			2,008
Condominium conversion communities		5,485			5,716			5,523
Acquired communities		10,808			4,477			—
Other property segments		21,961			20,769			19,112
Other		255			1,000			457

Consolidated revenues	$	280,496		$	266,792		$	251,857


Contribution to Property Net Operating Income
Fully stabilized communities	$	143,432		$	139,351		$	139,608
Communities stabilized during prior year		4,957			4,885			115
Condominium conversion communities		3,613			3,675			3,569
Acquired communities		7,230			3,163			—
Other property segments, including corporate management expenses		(7,106	)		(6,702	)		(4,015	)

Consolidated property net operating income		152,126			144,372			139,277


Interest income		661			817			894
Other revenues		255			1,000			457
Minority interest in consolidated property partnerships		239			671			1,605
Depreciation		(70,435	)		(73,665	)		(71,832	)
Interest		(55,638	)		(59,763	)		(58,309	)
Amortization of deferred loan costs		(4,661	)		(4,304	)		(3,801	)
General and administrative		(18,307	)		(18,205	)		(13,841	)
Investment, development and other		(5,242	)		(2,930	)		(2,715	)
Termination of debt remarketing agreement (interest expense)		—			(10,615	)		—
Loss on early extinguishment of indebtedness		—			(4,011	)		—
Severance charges		(796	)		—			(21,506	)
Proxy contest and related costs		—			—			(5,231	)
Equity in income (losses) of unconsolidated real estate entities		1,767			1,083			7,790
Gain on sale of technology investment		5,267			—			—


Income (loss) from continuing operations		5,236			(25,550	)		(27,212	)
Income from discontinued operations		143,811			122,727			47,309

Net income	$	149,047		$	97,177		$	20,097

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108

POST APARTMENT HOMES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

16. SUPPLEMENTAL CASH FLOW INFORMATION

Non-cash investing and financing activities for the years ended December 31, 2005, 2004 and 2003 are as follows:

In 2005, the Operating Partnership sold three communities subject to $81,560 of tax-exempt mortgage indebtedness assumed by the purchasers. In 2004, the Operating Partnership sold certain apartment communities subject to $104,325 of tax-exempt mortgage indebtedness assumed by the purchasers. Additionally in 2004, the Operating Partnership acquired an apartment community, including the assumption of mortgage indebtedness with an estimated fair value of $49,496. These transactions were excluded from the cash flow statement as non-cash transactions.

In 2005, the Operating Partnership’s derivative financial instruments increased in value causing a decrease in accounts payable and accrued expenses and a corresponding increase in partners’ equity of $5,850. In 2004, the Operating Partnership’s derivative financial instruments increased in value causing a decrease in accounts payable and accrued expenses and a corresponding increase in partners’ equity of $3,945. In 2003, the Operating Partnership’s derivative financial instruments increased in value causing a decrease in accounts payable and accrued expenses and a corresponding increase in partners’ equity of $2,702.

The Operating Partnership committed to distribute $19,257, $19,203 and $19,043 for the quarters ended December 31, 2005, 2004 and 2003, respectively.

In 2005, the Operating Partnership’s taxable REIT subsidiaries made income tax payments to federal and state taxing authorities totaling $760. Such income tax payments were not material in 2004 and 2003 due to the existence of tax loss carryforwards at the taxable REIT subsidiaries (see note 8).

17. SALE OF TECHNOLOGY INVESTMENT

In 2005, the Operating Partnership sold its investment in Rent.com, a privately-held internet leasing company, and recognized a gain of $5,267.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)

18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Under SFAS No. 144, as further discussed in note 5, the operating results of apartment communities classified as held for sale were included in discontinued operations in the accompanying statements of operations for all periods presented. To conform with this presentation, the quarterly financial information presented below reflects the reclassification of the operating results of these assets to discontinued operations, which in 2004 differ from the presentation of discontinued operations included in the Operating Partnership’s previously issued financial statements included in its quarterly reports on Form 10-Q filed in 2004. Due to the timing of discontinued operations, the quarterly financial information presented below is consistent with the Operating Partnership’s quarterly financial information reported in its 2005 Form 10-Qs. Quarterly financial information for the years ended December 31, 2005 and 2004, as revised to reflect the change discussed above was as follows:


	Year ended December 31, 2005
	First			Second			Third			Fourth
Revenues	$	67,646		$	69,130		$	71,900		$	71,820

Income (loss) from continuing operations		1,104			(1,067	)		1,584			3,615
Income from discontinued operations		3,740			62,928			75,661			1,482

Net income		4,844			61,861			77,245			5,097
Distributions to preferred unitholders		(1,909	)		(1,910	)		(1,909	)		(1,909	)

Net income available to common unitholders	$	2,935		$	59,951		$	75,336		$	3,188

Earnings per Common Unit:
Net income available to common unitholders – basic	$	0.07		$	1.42		$	1.77		$	0.08
Net income available to common unitholders – diluted	$	0.07		$	1.42		$	1.75		$	0.08


	Year ended December 31, 2004
	First			Second			Third			Fourth
Revenues	$	64,696		$	65,877		$	68,850		$	67,369

Loss from continuing operations		(2,679	)		(2,847	)		(3,686	)		(16,338	)
Income from discontinued operations		7,419			112,564			2,194			550

Net income (loss)		4,740			109,717			(1,492	)		(15,788	)
Distributions to preferred unitholders		(3,997	)		(3,310	)		(2,889	)		(1,909	)
Redemption costs on preferred stock and units		(1,716	)		—			(1,810	)		—

Net income (loss) available to common unitholders	$	(973	)	$	106,407		$	(6,191	)	$	(17,697	)

Earnings per Common Unit:
Net income (loss) available to common unitholders – basic	$	(0.02	)	$	2.49		$	(0.14	)	$	(0.42	)
Net income (loss) available to common unitholders – diluted	$	(0.02	)	$	2.49		$	(0.14	)	$	(0.42	)

19. OTHER EVENTS

Subsequent to the filing of the Operating Partnership’s annual report on Form 10-K, as amended, the Operating Partnership revised its consolidated financial statements for the years ended December 31, 2005, 2004 and 2003, to reflect four apartment communities classified as held for sale (one of which was sold in 2006) in the nine months ended September 30, 2006, which were not classified as held for sale as of December 31, 2005, as discontinued operations, pursuant to certain provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long Lived Assets.” Accordingly, the Operating Partnership has retrospectively adjusted its audited financial statements for the years ended December 31, 2005, 2004 and 2003 to reflect the disposition of these apartment communities that met the criteria to be classified as discontinued operations. The effect of the retrospective adjustment represents a $1,339, $462 and $1,560 decrease in the Operating Partnership’s previously reported income (loss) from continuing operations for the years ended December 31, 2005, 2004 and 2003, respectively. As a result of the foregoing, Notes 5, 6, 15 and 18 (unaudited) to the consolidated financial statements for the years ended December 31, 2005, 2004 and 2003 have been retrospectively adjusted. This retrospective adjustment has no effect on the Operating Partnership’s reported net income, net income available to common unitholders, financial condition or net cash flows.

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