Business Context and Reporting Period
Company: Apartment Investment & Management Company (AIMCO)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Business Overview: AIMCO is a Real Estate Investment Trust (REIT) owning and managing a diversified portfolio of apartment communities across the United States and Puerto Rico. As of September 30, 2002, the Company owned a controlling interest in 179,663 units in 694 properties and managed an additional 147,207 units in unconsolidated or third-party properties.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2002 | Nine Months Ended Sep 30, 2002 |
|---|---|---|
| Revenue (Rental & Other) | $367,049 | $1,052,905 |
| Net Income | $46,345 | $162,437 |
| Net Income Attributable to Common Stockholders | $24,253 | $90,971 |
| Diluted EPS (Common) | $0.26 | $1.07 |
| Operating Cash Flow | N/A | $404,243 |
| Total Assets | $10,111,550 | N/A |
| Total Indebtedness | $5,909,493 | N/A |
| Cash and Cash Equivalents | $87,475 | N/A |
| Funds From Operations (FFO) - Diluted | $123,235 | $391,558 |
Material Changes vs. Prior Period
- Revenue Growth: Rental revenues increased 16.5% for the quarter and 11.6% for the nine-month period compared to 2001. This growth was primarily driven by the consolidation of properties acquired through the $1.1 billion Casden Merger (completed March 2002) and the New England Properties Acquisition (completed August 2002).
- Net Income Surge: Net income attributable to common stockholders rose significantly from $1.77 million in Q3 2001 to $24.25 million in Q3 2002. For the nine-month period, it increased from $5.12 million to $90.97 million.
- Discontinued Operations: The Company reported a net loss of $8.1 million for the quarter and $10.3 million for the nine months from discontinued operations, primarily due to losses on the disposal of non-strategic assets (including senior living facilities) and impairment charges. This contrasts with a net gain in the prior year periods.
- Depreciation Reduction: Consolidated depreciation decreased by $5.2 million for the quarter and $50.4 million for the nine months, largely due to a change in the estimated useful lives of buildings and improvements adopted in 2001.
- Provision for Losses: A provision for losses on notes receivable of $1.7 million (quarter) and $4.8 million (nine months) was recorded in 2002, compared to none in the prior year periods.
Guidance, Outlook, Risks, and Unusual Items
- Acquisitions: The Company completed the $1.1 billion Casden Merger and the $500 million New England Properties Acquisition in 2002, significantly expanding its portfolio. It also committed to purchasing two properties under development for a minimum of $619 million upon completion.
- Dividend Policy: The Board distributes approximately 68.5% of FFO and 83.4% of Adjusted Funds From Operations (AFFO) to common stockholders. The policy aims to increase dividends annually by half of the projected increase in AFFO.
- Legal Contingencies:
- Insurance Dispute: AIMCO faces a risk of impairment on a $16.7 million receivable and a $5.7 million contingent liability related to the financial failure of insurance agent National Program Services (NPS) and improper cancellation of coverage by National Union Fire Insurance Company.
- San Francisco Lawsuit: The City Attorney of San Francisco has sued AIMCO regarding housing code violations at four properties, seeking civil penalties. Trial is set for July 2003.
- Mold Litigation: The Company is named in lawsuits alleging personal injury due to mold. While insurance coverage for property damage related to mold has been excluded by some carriers since March 2002, the Company does not expect material adverse effects at this time.
- Accounting Changes:
- Leasing Commissions: In Q3 2002, the Company changed its accounting method for leasing commissions from expensing as incurred to deferring and amortizing over the lease term, resulting in a $3.1 million decrease in expenses and a $2.7 million increase in net income.
- Discontinued Operations: Adoption of SFAS 144 required reclassifying assets held for sale and sold properties as discontinued operations.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the 0.55 to 1.0 debt-to-gross asset value ratio and 2.25 to 1.0 interest coverage ratio required by the credit facility and Casden Loan.
- Insurance Receivables: Monitor the status of the $16.7 million receivable from National Union and the $5.7 million contingent liability from NPS/Cananwill.
- Same-Store Performance: Review same-store net operating income, which decreased 3.6% for the quarter and 0.8% for the nine months, driven by lower occupancy and higher maintenance costs.
- Capital Expenditures: Assess the impact of increased Capital Replacement ($61.0 million) and Capital Enhancement ($6.2 million) spending on future AFFO.
- Discontinued Operations: Confirm the finalization of the $18.8 million change in estimate related to the historical carrying value of sold assets, which boosted 2002 earnings.