Business context and reporting period
Apartment Investment and Management Company (Aimco), a REIT, filed a combined 10-K with its operating partnership, AIMCO Properties, L.P., for the fiscal year ended December 31, 2015. Aimco owned 95.2% of the partnership’s common units. The business owns, operates, redevelops and selectively develops apartment communities, primarily in major coastal and job-growth markets. At year-end, the portfolio comprised 196 communities and 49,149 homes; conventional and affordable operations generated 90% and 10% of proportionate property NOI, respectively.
Financial and operating performance
| Metric | 2015 | 2014 | Change / context |
|---|---|---|---|
| Total revenue | $981.3 million | $984.4 million | Down 0.3% |
| Operating income | $256.2 million | $262.4 million | Down 2.3% |
| Income from continuing operations | $91.4 million | $67.5 million | Up 35.4% |
| Net income attributable to Aimco common stockholders | $236.0 million | $300.2 million | Down $64.3 million; prior-year results included larger disposition gains |
| Diluted earnings per common share | $1.52 | $2.06 | Down 26.2% |
| Net cash from operating activities | $359.9 million | $321.4 million | Up $38.5 million |
| Total assets | $6.14 billion | $6.10 billion | Up 0.8% |
| Total indebtedness | $3.87 billion | $4.14 billion | Down $262.0 million |
Property performance strengthened: conventional same-store revenue grew 4.5% and NOI grew 5.6%; conventional segment NOI rose 10.4% to $534.7 million. Affordable segment NOI increased 3.5% to $58.1 million. The conventional portfolio reported a 67% operating margin and 60% free-cash-flow margin; these are portfolio measures, not consolidated GAAP margins. Conventional same-store new and renewal rent growth was 4.9% overall, with new leases 4.4% and renewals 5.5% above expiring rents.
Interest expense declined 9.6% to $199.7 million. Cash and cash equivalents were $50.8 million and restricted cash was $87.0 million at year-end. The $600 million revolving facility had $27.0 million drawn and $536.6 million of borrowing capacity after letters of credit. Management described approximately $675 million of cash, restricted cash and available credit combined. Capital expenditures were $367.2 million, including $117.8 million for redevelopment and $115.6 million for development.
At year-end, property debt totaled $3.85 billion, with an 8.1-year weighted-average maturity; approximately 98% was fixed-rate. Aimco’s leverage ratios improved year over year: proportionate debt plus preferred equity to Adjusted EBITDA was 6.8x versus 7.6x, and Adjusted EBITDA coverage of interest and preferred dividends was 2.8x versus 2.5x. The company’s stated targets are below 7.0x and above 2.5x, respectively. These are non-GAAP measures.
Material changes versus the prior comparable period
- Common-stockholder net income declined chiefly because net gains on real estate dispositions fell to $180.6 million from $288.6 million. Aimco sold 11 communities in 2015 versus 30 in 2014.
- Although total revenue was nearly flat, property-level results improved, interest expense decreased, and operating cash flow increased.
- Adjusted FFO per diluted share increased 12%, while pro forma FFO per diluted share increased 8%, according to management. The filing attributes growth to stronger property operations and redevelopment/acquisition contributions, partly offset by property sales.
- Debt declined, including revolving-credit borrowings from $112.3 million to $27.0 million. Aimco issued 9.43 million common shares in January 2015, generating $366.6 million net proceeds, and redeemed $27 million of CRA preferred stock.
- Common dividends declared increased to $1.18 per share from $1.04. The board declared a $0.33 quarterly dividend in January 2016 and anticipated similar quarterly dividends for the rest of 2016, subject to review.
Outlook, commentary, risks and unusual items
Management expected to invest $180 million to $220 million in conventional redevelopment and development during 2016. It also expected to close in summer 2016 on a Northern California community under construction for $320 million, funded mainly with a property loan and proceeds from asset sales. One Canal in Boston was expected to complete construction in April 2016; leasing and stabilization remained in progress at several redevelopment and development properties. These expectations are forward-looking and subject to project, market and financing risks.
Key risks include rent and occupancy pressure from new supply, economic or local-market weakness, operating-cost inflation, project cost or schedule overruns, financing availability and debt covenant compliance, and changes in interest rates. Government housing subsidies included in rental revenue were $73.4 million in 2015; about 14.5% related to contracts that expired in late 2015 or expire in 2016 and were being renewed or expected to be renewed. REIT qualification and distribution requirements, environmental liabilities, insurance/casualty exposure, and rent regulation are additional risks.
Two environmental matters involve properties Aimco no longer owns: an EPA inquiry concerning groundwater near a former Indiana community and a proposed cleanup order concerning a former Lake Tahoe dry-cleaning site. Outcomes are uncertain; management did not expect either to materially adversely affect consolidated financial condition, results or cash flows. The filing also identifies $110 million of construction-related commitments, mostly expected within 12 months, and $25 million of nonrefundable deposit paid toward the Northern California acquisition. Aimco reported compliance with debt covenants and expected to remain compliant over the following 12 months. The independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether same-store rent and NOI growth, redevelopment lease-up and the projected 2016 investment returns persist as projects complete.
- The terms, financing and closing status of the planned $320 million acquisition, and whether asset-sale proceeds fund it as expected.
- Debt maturities, refinancing access, covenant headroom and the assumptions underlying non-GAAP leverage and coverage ratios.
- Renewal of housing-assistance contracts and the potential effect of any subsidy reductions.
- Developments in the Indiana and Lake Tahoe environmental matters, including any change in potential remediation obligations.
- Dividend coverage and payout: the board targets a payout of approximately 65% of Adjusted FFO, a non-GAAP measure whose calculation includes management estimates of replacement capital.