APARTMENT INVESTMENT & MANAGEMENT CO quarterly report, Q2 FY2016

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Business context and reporting period

Apartment Investment and Management Company (Aimco), a REIT, filed this combined Form 10-Q with AIMCO Properties, L.P. for the quarter and six months ended June 30, 2016. The Operating Partnership owns and operates the business; Aimco held a 95.3% common-unit interest. The portfolio comprised 137 conventional communities with 38,841 homes and 56 affordable communities with 8,685 homes. Figures below are consolidated unless identified otherwise.

Financial performance and position

  • Revenue: Second-quarter revenue was $251.2 million, up 2.6% year over year; first-half revenue was $497.5 million, up 1.7%.
  • Operating results: Second-quarter operating income was $64.4 million versus $65.6 million; first-half operating income was $128.0 million versus $126.7 million. Same-store conventional NOI increased 4.1% in the quarter and 5.5% in the first half. Affordable NOI increased 12.1% and 9.1%, respectively.
  • Profit and per-share results: Net income attributable to Aimco common stockholders was $221.4 million ($1.42 diluted per share) in Q2, versus $60.8 million ($0.39) a year earlier. For the first half, it was $244.6 million ($1.57 per share), versus $150.1 million ($0.97). The increases principally reflect higher real-estate disposition gains, not solely recurring operations.
  • REIT operating measures: Diluted FFO per share was $0.59 in Q2 and $1.16 for the first half, versus $0.56 and $1.07. AFFO per share was $0.50 and $1.01, versus $0.46 and $0.92. These are non-GAAP measures.
  • Cash flow: First-half operating cash flow was $176.8 million, up from $157.3 million. Investing cash outflow was $154.7 million, including $166.0 million of capital expenditures; financing cash outflow was $17.6 million. Cash and cash equivalents ended at $55.2 million.
  • Debt and liquidity: Total indebtedness was $4.0 billion, including $3.8 billion of non-recourse property debt and $160.5 million drawn on the revolving facility. Restricted cash was $375.1 million, including $289.7 million of sale proceeds held for a tax-deferred exchange and not available to reduce leverage. Revolver capacity available was $410.0 million. Proportionate debt to adjusted EBITDA was 6.4x; debt plus preferred equity to adjusted EBITDA was 6.8x. The company reported covenant coverage above required minimums and expected continued compliance.
  • Distributions: Common dividends and distributions declared were $0.33 per share/unit for Q2 and $0.66 for the first half, versus $0.30 and $0.58 in 2015.

Material changes and notable items

  • Q2 disposition gains, net of tax, were $216.5 million, compared with $44.8 million in Q2 2015. First-half gains were $222.7 million, compared with $130.5 million. Aimco sold three communities in the first half for gross proceeds of $301.9 million.
  • Interest expense declined 1.4% in Q2 and 6.4% in the first half, principally due to lower average property-debt balances and prior-period debt repayments; higher revolver borrowings partly offset the decrease.
  • Conventional same-store Q2 revenue rose 4.2%, while expenses rose 4.6%, producing 4.1% NOI growth. Management cited higher rents, partly offset by lower occupancy and increased taxes, insurance, personnel, technology and turnover costs.
  • In June, the buyer of the legacy Napico portfolio made final payments. Aimco recognized a $5.0 million gain on derecognition of related net liabilities and wrote off a $7.8 million deficit noncontrolling-interest balance. Obligations and interests related to two communities remain.
  • Restricted cash rose substantially, largely because disposition proceeds were being held for reinvestment through a tax-free exchange.

Outlook, management commentary and risks

  • Management expects 2016 development and redevelopment spending of $180 million to $220 million and property-upgrade spending of $70 million to $75 million. No full-year earnings or FFO guidance is stated in the supplied filing text.
  • A $320 million purchase of a 463-home Northern California community under construction was expected to close upon completion, anticipated by the end of Q3 2016. Management reported leasing and rents ahead of underwriting. A $25 million nonrefundable deposit had been paid.
  • Management targets proportionate debt plus preferred equity below 7.0x adjusted EBITDA and adjusted EBITDA coverage of interest and preferred dividends above 2.5x. It cited anticipated leverage reduction from earnings growth and scheduled amortization.
  • About 98% of property-level debt was fixed rate, with a weighted-average maturity of 7.7 years. Variable-rate debt and revolver borrowings totaled approximately $244.8 million; management estimated a 100-basis-point LIBOR increase would reduce annual net income by $2.3 million.
  • Material risk areas include apartment-market conditions, employment and new supply, access to financing and covenant compliance, redevelopment cost and lease-up execution, REIT qualification, litigation, weather and environmental remediation. The filing discusses an Indiana groundwater matter and a Lake Tahoe cleanup proceeding; management did not expect either to materially affect the company, but outcomes remain uncertain.
  • Management reported effective disclosure controls and no material change in internal control over financial reporting. It stated that risk factors had not materially changed from the 2015 Form 10-K.

Important facts for investors to verify

  1. How much reported earnings growth is attributable to asset-sale gains versus recurring property operations and FFO/AFFO trends.
  2. Completion, total cost, lease-up and stabilization performance of major redevelopment projects, and whether spending remains within the stated range.
  3. Closing and operating performance of the $320 million Northern California acquisition, including funding and the effect on leverage.
  4. Availability and permitted use of restricted cash, particularly the tax-exchange proceeds, and actual liquidity after reinvestment.
  5. Debt maturities, revolver usage, covenant headroom, and progress toward management’s leverage targets.
  6. Developments in environmental matters, remaining Napico guarantees and legal interests, and any resulting cash or liability exposure.