Apartment Investment & Management Company (Aimco) — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. This combined filing covers Aimco, a REIT, and its controlled operating partnership. Aimco reported a 94.6% ownership interest in the partnership at quarter-end. Its business focuses on owning, operating, redeveloping and selectively developing apartment communities.
Business context and operations
At September 30, Aimco’s real estate portfolio included 133 communities and 36,481 apartment homes; 129 communities were consolidated. Average daily occupancy was 96.3%, up 30 basis points year over year. Same Store renewal and new-lease rents increased 4.2% and 2.2%, respectively, for a 3.2% weighted average increase. The company sold its Asset Management business and certain communities during the period, materially affecting reported results and comparisons.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $242.5 million | $254.6 million | $740.4 million | $750.2 million |
| Operating income | $47.0 million | $59.2 million | $149.7 million | $176.7 million |
| Net income | $603.9 million | $22.1 million | $706.8 million | $60.9 million |
| Net income attributable to Aimco common stockholders | $567.0 million | $17.4 million | $651.4 million | $44.8 million |
| Diluted earnings per Aimco common share | $3.61 | $0.11 | $4.15 | $0.29 |
| AFFO per diluted share (non-GAAP) | $0.56 | $0.54 | $1.64 | $1.56 |
Net income included gains on dispositions, including the Asset Management business sale; it is not a measure of recurring operating performance. Q3 disposition gains, net of related income tax, were $572.1 million. For the nine-month period, disposition gains were $622.6 million. Q3 revenue fell partly because of the Asset Management business sale; Real Estate portfolio operations improved. Q3 Same Store NOI increased 2.6% as revenue rose 3.1% and expenses rose 4.5%. Real Estate segment proportionate NOI increased 9.3% in Q3 and 9.6% year to date.
For the nine months, operating cash flow was $302.9 million, investing cash flow was positive $239.1 million and financing cash flow was negative $580.3 million. Cash, cash equivalents and restricted cash ended at $104.3 million, versus $142.5 million at the start of the period. Investing cash flow included $708.5 million of disposition proceeds, $212.4 million for real estate acquisitions and $253.1 million of capital expenditures.
At September 30, total indebtedness associated with the real estate portfolio was $3.647 billion; there were no term-loan or revolving-credit-facility borrowings. Cash and cash equivalents were $58.0 million, restricted cash was $46.3 million, and available revolver capacity was $592.9 million. Aimco reported $2.3 billion of unencumbered communities by estimated fair value. Its leverage ratios were 6.5x proportionate debt/Adjusted EBITDA and 6.9x proportionate debt plus preferred equity/Adjusted EBITDA; Adjusted EBITDA coverage of interest and preferred dividends was 3.1x. These are company-defined non-GAAP measures.
Material changes, outlook and commentary
- Aimco sold its Asset Management business and four Hunters Point communities for $590 million, generating $512.2 million of net proceeds and a $448.2 million after-tax gain. It also sold Chestnut Hill Village for $170.4 million gross proceeds and a $122.6 million after-tax gain.
- The company acquired Bent Tree Apartments for $160 million and four Philadelphia-area communities for total consideration that included assumed debt and OP Units. It terminated an agreement to acquire The Victor after required city approvals were not obtained; another Philadelphia-area acquisition was expected after construction completion in the first half of 2019.
- Management expected 2018 capital-enhancement investment of $90–$100 million and total redevelopment and development spending of $170–$190 million. At September 30, estimated or potential redevelopment/development investment totaled $554.4 million, of which $338.6 million had been funded; projected weighted average NOI yield was 6.1% on untrended rents.
- Management targeted proportionate debt and preferred equity to Adjusted EBITDA below 7.0x and Adjusted EBITDA to interest and preferred dividends above 2.5x. It expected debt leverage ratios to decline before year-end. The company had rate-locked $620 million of property loans for refinancing; it expected approximately $14 million of debt-extinguishment costs and intended to redeem $125 million of callable preferred stock in May 2019.
- After quarter-end, in October, Aimco repurchased 1.7 million common shares for $75 million, at a weighted-average $43.89 per share. The company said its near-term business plan did not contemplate an equity issuance.
- Risks include apartment-market and operating-cost changes, financing availability and cost, debt-covenant compliance, severe weather and insurance, legal and regulatory matters, and environmental liabilities. Aimco disclosed ongoing Airbnb litigation and environmental matters involving former properties; management did not expect the described environmental matters to have a material adverse effect. The filing also cited approximately $130.6 million of capital-related commitments, most expected within 12 months.
Most important facts for investors to verify
- How much of reported earnings growth reflects one-time disposition gains and tax benefits versus recurring property operations; review AFFO and its company-specific adjustments.
- Whether refinancing plans, the intended preferred-stock redemption and projected debt-extinguishment costs are completed on expected terms and timing.
- Whether Same Store revenue growth can continue to exceed expense growth, and whether redevelopment lease-ups and projected returns meet management’s expectations.
- The ultimate cash, legal and operational effects of Airbnb litigation, environmental matters and other contingencies.
- How the October share repurchase and planned capital spending affect liquidity, leverage and future distributions.