Business Context and Reporting Period
Company: Apartment Investment & Management Company (Aimco)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2003
Business Overview: Aimco is a Real Estate Investment Trust (REIT) owning and operating a geographically diversified portfolio of apartment properties. As of March 31, 2003, the Company owned a controlling interest in 186,791 units across 727 properties and managed an additional 51,292 units for third-party owners. The Company was added to the S&P 500 during the quarter.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2003 | Q1 2002 |
|---|---|---|
| Revenue (Rental & Other Property) | $378,815 | $314,454 |
| Net Income | $21,823 | $70,059 |
| Net Income Attributable to Common Stockholders | $(318) | $44,580 |
| Funds From Operations (FFO) - Diluted | $101,518 | $135,238 |
| Adjusted Funds From Operations (AFFO) | $67,411 | $100,452 |
| Free Cash Flow | $182,792 | $201,984 |
| Total Indebtedness | $6,280,784 | $6,212,371 |
| Cash and Cash Equivalents | $106,917 | $99,553 |
| Dividends Paid per Common Share | $0.82 | $0.82 |
Material Changes vs. Prior Period
- Net Income Decline: Net income dropped significantly from $70.1 million in Q1 2002 to $21.8 million in Q1 2003. This was primarily driven by a $14.2 million swing in discontinued operations (from a $10.5 million gain to a $3.7 million loss) and a decrease in interest and other income.
- Revenue Growth: Consolidated rental revenues increased 20.4% to $378.8 million, driven by $46.2 million from acquisition properties (Casden and New England acquisitions) and $35.6 million from newly consolidated properties.
- Same-Store Performance: Despite overall revenue growth, "same store" properties (owned for over a year) saw a 6.0% revenue decrease and a 15.7% decline in Net Operating Income (NOI). This was due to a 2.3% drop in occupancy (90.3% vs 92.6%) and a $19 decrease in average rent per unit.
- Operating Expenses: Property operating expenses rose 44.7% to $168.0 million, largely due to the inclusion of new acquisitions and increased costs for contract services, utilities, and turnover.
- Discontinued Operations: The loss in discontinued operations included $5.3 million in impairment charges on assets held for sale, offset by $3.1 million in gains on properties sold.
Guidance, Outlook, Risks, and Unusual Items
- Dividend Policy: The dividend of $0.82 per share represents 126% of AFFO (before capital enhancements) and 91% of FFO for the quarter. Management monitors the payout ratio and may adjust the dividend if it exceeds 100% of AFFO for a sustained period.
- Liquidity and Capital Resources: The Company has $106.9 million in cash and $212.5 million in restricted cash. A revolving credit facility was amended to increase availability to $500 million (subject to syndication) and extend maturity to July 2005. As of March 31, 2003, $367 million was drawn on the credit facility.
- Unusual Items:
- Tax Benefit: A one-time $8.0 million deferred tax benefit was recognized in Q1 2003 due to the contribution of NHP Management Company stock, increasing net income by approximately $7.1 million.
- Stock-Based Compensation: The Company adopted SFAS 123 effective Jan 1, 2003, resulting in pro forma compensation expenses that reduced reported earnings.
- Risks and Contingencies:
- Legal Proceedings: Significant litigation includes a $95.1 million judgment against a former subsidiary (NAPICO) regarding securities violations and fiduciary duties (expected to be covered by former shareholders); lawsuits regarding mold exposure; and disputes with insurance agents (NPS) and related parties regarding premium funding and indemnities.
- Development Commitments: The Company has commitments to purchase three development phases (Park La Brea and Westwood) totaling approximately $563 million upon completion and occupancy targets, along with a $70 million stand-by financing facility.
- Interest Rate Risk: The Company has $1.48 billion in variable-rate debt (23.5% of total debt). A 1% increase in interest rates would reduce annual income by approximately $14.8 million.
Investor Verification Checklist
- Same-Store Trends: Verify the sustainability of the 2.3% occupancy decline and $19 rent reduction in the core "same store" portfolio, which contrasts with the revenue growth from acquisitions.
- Discontinued Operations: Review the $5.3 million impairment charges on assets held for sale to assess the quality of the remaining portfolio and future disposition plans.
- Dividend Coverage: Monitor the payout ratio relative to AFFO, which exceeded 100% (126%) in this quarter, to evaluate the risk of a dividend cut.
- Legal Exposure: Assess the potential financial impact of the NAPICO judgment (though attributed to former shareholders) and the ongoing insurance-related litigation involving NPS and Cananwill.
- Debt Maturities: Review the $175.2 million in scheduled debt maturities for the remainder of 2003 and the Company's refinancing strategy.