Business context and reporting period
Apartment Investment and Management Company (Aimco) and its operating partnership filed this unaudited Form 10-Q for the quarter ended September 30, 2019. Aimco is a REIT whose operating partnership holds and manages the business. At quarter-end, Aimco owned 94.0% of the partnership’s common units. The portfolio included interests in 128 apartment communities with 33,824 homes.
Financial performance and position
Unless noted otherwise, amounts are in millions. Aimco and the operating partnership report substantially the same consolidated operating results.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $229.8 | $242.5 | $684.3 | $740.4 |
| Net income | $4.0 | $603.9 | $365.3 | $706.8 |
| Net income attributable to Aimco common stockholders | $2.0 | $567.0 | $332.8 | $651.4 |
| Diluted GAAP earnings per Aimco share | $0.01 | $3.73 | $2.26 | $4.28 |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $278.7 | $302.9 |
Q3 Same Store net operating income (NOI) rose 4.1%, with a 73.1% NOI margin; same-store occupancy averaged 96.8%, up 40 basis points. Renewal rents increased 4.6%, new-lease rents 2.5%, and the weighted-average increase was 3.6%. Nine-month Same Store NOI increased 4.7%.
Non-GAAP per-share measures: Q3 Nareit FFO was $0.61 versus $0.76; Pro forma FFO was $0.64 versus $0.63; and AFFO was $0.56 in both periods. For nine months, Pro forma FFO was $1.85 versus $1.83 and AFFO was $1.62 versus $1.64. Management cautions that these non-GAAP measures are not necessarily comparable across REITs.
At September 30, total assets were $6.54 billion, net real estate $6.05 billion, total indebtedness $4.25 billion, and equity $1.79 billion. Debt increased from $4.08 billion at December 31, 2018; the $160.4 million revolving-facility balance at year-end had been repaid, leaving no revolver borrowings. Cash and restricted cash totaled $93.2 million, with $792.8 million of available revolver capacity. Unencumbered communities had estimated fair value of approximately $2.4 billion.
Material changes versus the prior comparable period
GAAP net income and EPS fell sharply, primarily because prior-year results included much larger disposition gains. Gain on dispositions was $1.1 million in Q3 2019 versus $626.2 million in Q3 2018; for nine months it was $356.9 million versus $679.7 million. The 2018 comparison also included the sale of the Asset Management business. Revenue declined 5.2% in Q3 and 7.6% year to date, while Same Store operating results improved.
Interest expense declined 7.7% in Q3 and 14.1% year to date, reflecting refinancing and debt payoff activity, partly offset by assumed acquisition debt and prepayment penalties. Cash from operations declined $24.2 million year over year for the nine-month period. Capital expenditures were $292.7 million, compared with $253.1 million.
Aimco redeemed $125.0 million of preferred stock during 2019. It also completed a reverse stock/unit split and paid a special distribution valued at $2.02 per share or unit, primarily in stock or partnership units, as part of total nine-month dividends and distributions of $2.80 per share or unit.
Outlook, management commentary, risks and unusual items
Management’s strategy emphasizes portfolio operations, capital recycling, redevelopment and development, and primarily non-recourse, fixed-rate property debt. It reported $71.3 million invested in redevelopment and development during Q3 and $168.2 million year to date. Approved and active projects had estimated total net investment of $577.5 million, of which $264.2 million had been funded; management expects to fund the balance through leverage and property-sale proceeds. The projected weighted-average NOI yield is 5.3%, assuming untrended rents.
Management reported leverage ratios of 7.5x proportionate debt and preferred equity to Adjusted EBITDAre, above its below-7.0x target, and 3.5x Adjusted EBITDAre coverage of interest and preferred dividends, above its greater-than-2.5x target. It expects the leverage ratios to be approximately 6.8x and 7.0x, respectively, by year-end. About 97.7% of leverage was property-level debt and 96.0% of that debt was fixed-rate; average property-debt maturity was 8.1 years. The company refinanced $668.0 million in Q3 at a weighted-average 3.34% rate and 11.4-year term. A separate $100 million loan, rate-locked at 3.21%, was expected to close in Q4.
Year to date, Aimco sold eight communities for net proceeds of $418.3 million and acquired three properties, including a 95% interest in 1001 Brickell Bay Drive for a stated purchase price of $156.8 million. Management said the paired acquisitions were expected to generate an approximately 9% weighted-average Free Cash Flow internal rate of return. No full-year earnings guidance is stated in the filing text; management expected 2019 capital-replacement spending per share to be flat year over year and capital enhancements of $85–$95 million.
Redevelopment and development commitments totaled approximately $308.9 million, most expected within 12 months. Key risks include local housing supply and demand, rents and occupancy, operating costs, access to financing and debt-covenant compliance, construction costs and schedules, natural disasters, regulatory matters, and environmental liabilities. Environmental matters include contaminated groundwater near a former Indiana property and remediation and an appealed cleanup order relating to a Lake Tahoe site; management did not expect either matter to have a material adverse effect. The IRS audit of 2011 and 2012 partnership tax years concluded in Q3 without material effect. The company also recorded $4.5 million of casualty losses in the first nine months, including fire and water/winter-storm claims.
The board declared a Q3 cash dividend of $0.39 per common share, payable November 29, 2019. Management reported both registrants’ disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Same Store rent, occupancy and NOI growth persist, and whether redevelopment lease-ups and project budgets meet stated schedules and returns.
- How the above-target leverage ratios progress toward management’s year-end expectations, alongside debt maturities, refinancing costs and covenant headroom.
- Whether property-sale proceeds and operating cash flow adequately fund redevelopment, development, acquisitions, capital spending and distributions.
- The recurring earnings picture after separating operating results from disposition gains, special items and non-GAAP adjustments.
- Developments in the Indiana and Lake Tahoe environmental matters, construction commitments, and any changes to related contingencies.