APARTMENT INVESTMENT & MANAGEMENT CO. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts are in millions unless stated otherwise. The filing combines Aimco and AIMCO Properties, L.P.; their operating results are substantially the same, with differences primarily in ownership interests and equity presentation.
Business context
Aimco is a REIT focused on owning, managing, redeveloping and selectively developing apartment communities. At quarter-end, it held interests in 128 communities with 33,820 homes and consolidated 124 communities with 33,678 homes. Its strategy includes selling lower-return properties and reinvesting proceeds in operations, redevelopment, development and acquisitions.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $224.2 | $250.2 | $454.4 | $497.9 |
| Net income | $70.0 | $7.2 | $361.3 | $102.8 |
| Net income attributable to Aimco common stockholders | $59.2 | $2.8 | $330.8 | $84.3 |
| Diluted earnings per Aimco common share | $0.40 | $0.02 | $2.25 | $0.55 |
| Pro forma FFO per share | $0.60 | $0.61 | $1.21 | $1.20 |
| AFFO per share | $0.51 | $0.54 | $1.06 | $1.07 |
Q2 Same Store NOI increased 4.6%; revenue rose 3.8% and property expenses rose 1.8%. Same Store NOI margin was 73.3%, occupancy averaged 96.9%, and renewal and new-lease rent increases averaged 5.0% and 2.0%, respectively, for a weighted average increase of 3.6%.
For the six months, operating cash flow was $170.0, down from $185.6. Investing activities provided $197.5, versus $293.7 used in the prior-year period, reflecting higher sale proceeds. Financing activities used $374.3. Cash, cash equivalents and restricted cash totaled $65.9 at period-end.
At June 30, total indebtedness was $4.00 billion: $3.70 billion of non-recourse property debt and $295.0 million drawn on the revolving credit facility. Proportionate Debt, the company’s non-GAAP leverage measure, was $3.85 billion; proportionate debt and preferred equity were $3.95 billion. Total liabilities were $4.30 billion and total equity was $1.84 billion.
Material changes and notable items
- GAAP net income increased sharply, primarily because gains on real estate dispositions were $64.3 million in Q2 and $355.8 million for the first half, compared with $0.3 million and $53.5 million in the respective 2018 periods. Eight communities were sold in the first half for $487.6 million gross proceeds.
- Revenue declined partly because the Asset Management business was sold in July 2018; the business contributed $19.1 million of Q2 2018 revenue and $41.4 million for first-half 2018. Property revenue attributable to real estate was $224.2 million in Q2 2019 versus $231.1 million a year earlier.
- Interest expense fell 20.8% in Q2 and 17.1% for the first half, primarily due to refinancing and debt payoff activity. First-half operating cash flow nevertheless declined, reflecting disposed assets and the prior Asset Management business sale, partly offset by improved Same Store and redevelopment performance.
- Aimco redeemed $125 million of Class A Perpetual Preferred Stock during the first half. The first-half dividend and distribution total was $2.41 per share or unit, including a $2.02 special dividend/distribution paid largely in cash and stock or partnership units. A reverse split was also effected during the period; per-share comparisons were adjusted as described in the filing.
- Subsequent to quarter-end, Aimco rate-locked $587 million of new non-recourse, fixed-rate property debt at a weighted average 3.37% rate and 11.5-year weighted average term; it expected $462 million of net proceeds after debt repayment to repay revolver borrowings. It also acquired a 95% interest in a Miami waterfront parcel for $157 million.
Outlook, management commentary and risks
- Management stated that current net leverage and leverage to Adjusted EBITDAre were above target, but expected to meet or be below target levels at year-end. Targets are proportionate debt and preferred equity to Adjusted EBITDAre below 7.0x and Adjusted EBITDAre coverage of interest and preferred dividends above 2.5x. Q2 ratios were 7.4x and 3.3x, respectively.
- At June 30, revolver capacity was $498.1 million after letters of credit; management reported pro forma capacity of $793.1 million following subsequent financing. Unencumbered communities had estimated fair value of $3.2 billion, or $2.3 billion pro forma the financing. Credit ratings were BBB- with stable outlook. The revolving-credit fixed-charge coverage covenant was 1.40x; the reported trailing-twelve-month ratio was 2.11x.
- Management expected full-year capital replacement expenditures per share to be flat year over year and capital enhancements of $80–$100 million. Estimated redevelopment and development investment was $573.3 million, with a projected weighted-average untrended NOI yield of 5.3%; $206.1 million had been funded. Parc Mosaic’s first-building delivery was delayed to August by unusually wet weather; management raised estimated total investment by $6 million to $123 million but said expected returns were unchanged.
- Management cited risks from real estate market conditions, competing supply, operating-cost increases, financing availability and cost, debt-service and covenant capacity, severe weather and insurance, legal and regulatory matters, environmental liabilities and continued REIT qualification. It reported no material change to previously disclosed risk factors and no material change in market-risk disclosures.
- Environmental matters include groundwater contamination near a former Indiana community and remediation obligations associated with a former Lake Tahoe dry-cleaning site. Outcomes remain uncertain; management did not expect either matter to materially affect financial condition, results or cash flows. Construction-related commitments were approximately $235.9 million, most expected within 12 months.
Important facts for investors to verify
- How much of the reported earnings increase came from property-sale gains and whether recurring FFO/AFFO trends support the earnings picture.
- Whether Same Store revenue, occupancy, rent growth and expense control remain consistent with Q2 performance.
- Execution, timing, costs and lease-up assumptions for the redevelopment and development pipeline, including the Parc Mosaic delay and Flamingo Point investment.
- Completion and terms of the post-quarter debt financing, use of proceeds, revolver balance and progress toward management’s year-end leverage targets.
- Cash available after restricted balances, capital commitments, dividends and debt service, as well as the status and potential costs of environmental and other contingencies.
Pro forma FFO, AFFO, NOI and leverage measures are non-GAAP measures defined by the company and should be considered alongside GAAP results.