AIV

Business Context and Reporting Period

Company: Apartment Investment & Management Company (Aimco)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: Aimco is a self-administered and self-managed Real Estate Investment Trust (REIT) engaged in the acquisition, ownership, management, and redevelopment of apartment properties. As of September 30, 2006, the company owned or managed 1,290 properties containing 224,837 units across 47 states, D.C., and Puerto Rico. The company operates two primary segments: Real Estate and Investment Management.

Key Financial Metrics

Material Changes vs. Prior Comparable Period

• Net Income Volatility: The company reported a net loss of $24.9 million for the three months ended September 30, 2006, compared to net income of $26.4 million in the same period in 2005. Conversely, for the nine-month period, net income increased to $94.3 million from $56.0 million in 2005.
• Discontinued Operations: A significant driver of the quarterly loss was a decrease in income from discontinued operations, primarily due to lower net gains on real estate sales ($9.4 million gain in Q3 2006 vs. $42.1 million in Q3 2005). However, the nine-month period saw a substantial increase in discontinued operations income ($128.1 million vs. $64.9 million) due to larger aggregate gains on property dispositions.
• Consolidation Impact (EITF 04-5): The adoption of EITF 04-5 resulted in the consolidation of 156 previously unconsolidated partnerships. This significantly increased reported revenues, depreciation, and interest expense but also boosted Net Operating Income (NOI) from property operations.
• Accounting Change (Tax Credits): Effective July 1, 2006, the company revised its accounting treatment for tax credit arrangements, recognizing proceeds from investors as revenue upon delivery of tax benefits rather than as equity. This change reduced net income by $14.4 million for the quarter and $6.8 million for the nine months.
• Same Store Performance: Consolidated same-store net operating income increased 9.2% for the quarter and 10.2% for the nine months, driven by higher occupancy (94.2% vs. 93.2% in Q3) and higher average rents ($817 vs. $785 in Q3).

Guidance, Outlook, and Risks

• Management Outlook: Management focuses on improving operations to increase occupancy and profitability, upgrading the portfolio through redevelopment, and monetizing property value. The company expects gross sales proceeds from 2006 dispositions to range between $1.2 billion and $1.4 billion, with proceeds used to reduce debt and fund capital expenditures.
• Liquidity: The company maintains $182.3 million in cash and cash equivalents and $348.3 million in restricted cash. It has a $850 million credit facility with $262.3 million available at period end.
• Capital Expenditures: For the nine months ended September 30, 2006, total capital expenditures were $366.9 million, including $60.1 million for capital replacements, $72.5 million for capital improvements, and $163.6 million for redevelopment.
• Risks and Contingencies:
  • Legal Proceedings: Ongoing litigation includes an insurance dispute with XL Reinsurance and Greenwich Insurance (trial set for Feb 2007) and an FLSA class action regarding overtime pay for maintenance workers. Management does not expect these to have a material adverse effect.
  • Environmental/Mold: Potential liabilities exist regarding hazardous substances and mold exposure, though no material costs have been incurred to date.
  • Interest Rate Risk: The company is exposed to variable interest rates on a portion of its debt, though it primarily utilizes long-term fixed-rate mortgage debt.

Key Facts for Investor Verification

• Accounting Adjustments: Verify the impact of the EITF 04-5 consolidation and the revised tax credit accounting treatment on the comparability of current results to prior periods.
• Discontinued Operations: Assess the sustainability of earnings given the heavy reliance on gains from property dispositions in the nine-month period ($124 million net gain).
• Debt Levels: Total indebtedness increased to $6.79 billion, largely due to newly consolidated properties; review debt maturity schedules and refinancing risks.
• FFO vs. Net Income: Note the divergence between GAAP Net Income (loss in Q3) and Funds From Operations (positive $74.3 million in Q3), which is a standard metric for REIT performance.
• Share Repurchases: The company repurchased approximately 1.94 million shares of common stock for $100 million during the nine-month period.