Business context and reporting period
Apartment Investment and Management Company (Aimco), a REIT, and its operating partnership filed combined unaudited Form 10-Q results for the quarter and six months ended June 30, 2017. The business owns, manages, redevelops and selectively develops apartment communities. At quarter-end, Aimco reported interests in 141 communities with 39,187 homes; Aimco owned 95.5% of the operating partnership’s common units.
Financial performance and condition
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $249.1 million | $251.2 million | $495.6 million | $497.5 million |
| Operating income | $59.7 million | $64.4 million | $117.5 million | $128.0 million |
| Net income attributable to Aimco common stockholders | $15.8 million | $221.4 million | $27.3 million | $244.6 million |
| Diluted GAAP earnings per share | $0.10 | $1.41 | $0.17 | $1.57 |
| Diluted FFO per share (non-GAAP) | $0.61 | $0.59 | $1.19 | $1.16 |
| Diluted AFFO per share (non-GAAP) | $0.51 | $0.50 | $1.02 | $1.01 |
Same Store property NOI increased 4.9% in Q2 (revenue +3.4%; property operating expenses decreased 0.3%). For the first half, Same Store NOI rose 4.6%. Q2 renewal and new lease rates were respectively 4.6% and 1.0% above expiring rents, for a weighted average increase of 2.7%. Dividends declared were $0.36 per common share in Q2 and $0.72 for the first half.
Six-month operating cash flow was $176.0 million, investing cash outflow $177.2 million and capital expenditures $176.4 million. Cash and cash equivalents were $44.9 million at June 30; restricted cash was $39.3 million. Available revolving-credit capacity was $343.4 million, after $245.7 million of borrowings and $10.9 million of letters of credit. Real Estate portfolio indebtedness was $4.112 billion, including a $249.0 million net term loan and $245.7 million of revolver borrowings. Reported total liabilities were $4.620 billion.
Changes versus prior comparable period
GAAP earnings fell sharply, principally because 2016 included a $216.5 million Q2 net gain on sales of Real Estate portfolio communities; Aimco sold no such communities in the first half of 2017. Higher depreciation and amortization from completed developments and redevelopments, the Indigo acquisition and capital additions also weighed on earnings. Underlying indicators improved: Q2 FFO per share increased 3.4% to $0.61 and AFFO per share rose 2.0% to $0.51. Revenue was broadly flat, while lower tax-credit and transaction revenues offset growth in property revenue.
On June 30, Aimco acquired its partner’s 47% interest in the Palazzo joint venture for $451.5 million, including $311.0 million cash and assumption of $140.5 million of property debt. The purchase was accounted for as an equity transaction and reduced Aimco equity by $155.6 million for consideration paid above the recorded noncontrolling interest. The transaction was funded partly with short-term borrowings.
Outlook, management commentary and risks
- Management targets net leverage of $3.8 billion and planned to sell communities in Rhode Island, Virginia, Maryland and New Jersey to repay the term loan and reduce leverage. It forecast year-end Proportionate Debt/Adjusted EBITDA of approximately 6.2x and debt plus preferred equity/Adjusted EBITDA of 6.6x, versus 6.8x and 7.2x, respectively, for Q2 under its stated calculation. These are non-GAAP measures.
- The $250 million term loan matures June 30, 2018, has a one-year extension option and bears interest at 30-day LIBOR plus 1.35%. Management expects to meet the credit-agreement fixed-charge coverage covenant; the reported trailing-twelve-month ratio was 1.97x against a 1.40x minimum.
- Management projected 2017 property-upgrade spending of $85–$95 million and total development and redevelopment spending of $160–$200 million. Its redevelopment/development portfolio had estimated net investment of $553.7 million and a projected weighted-average NOI yield of 6.1%. Near-term plans did not contemplate an equity issuance.
- Approximately 97.7% of property-level debt was fixed-rate, with a 7.1-year weighted-average maturity. A 100-basis-point increase in 30-day LIBOR was estimated to reduce annual net income by about $5.6 million. Management noted risks from local market conditions and competing supply, operating costs, access and cost of financing, covenant compliance, insurance, legal matters, regulation and environmental remediation. Results are not necessarily indicative of full-year results.
- Contingencies include a California property-rights lawsuit set for jury trial in February 2018 and environmental proceedings relating to former properties in Indiana and Lake Tahoe. Management did not expect these matters to have a material adverse effect, but outcomes remain uncertain. Capital commitments for redevelopment, development and improvements were approximately $80.8 million, mostly expected over the next 12 months.
- A January 2017 accounting-standard adoption produced a $62.5 million cumulative reduction to opening retained earnings for tax effects of intercompany asset transfers. The filing says this was an accounting adjustment, not a current-period operating loss.
Important facts for investors to verify
- Whether planned asset sales occur on schedule and generate enough proceeds to repay short-term borrowings and restore target leverage.
- Progress, costs, occupancy and rent achievement in redevelopment and lease-up projects, and whether the projected 6.1% NOI yield is realized.
- Underlying rental growth, occupancy and expense trends, particularly given the decline in average daily occupancy noted for Same Store communities.
- Reconciliation of GAAP earnings to FFO and AFFO, which are non-GAAP measures, and the continuing effect of the lower asset-management tax-credit business.
- Debt maturities, variable-rate exposure, covenant headroom and the 2018 term-loan repayment or extension plan.
- Developments in the environmental matters, litigation and capital commitments; the filing provides no clear quantified ultimate exposure for these contingencies.