Business context and reporting period
Apartment Investment and Management Company (Aimco) and AIMCO Properties, L.P. filed a combined unaudited Form 10-Q for the quarter and six months ended June 30, 2014. Aimco is a REIT that conducts its business through the Operating Partnership. The business focuses on owning and managing apartment communities in major coastal and job-growth markets.
At quarter-end, Aimco had interests in 157 conventional communities with 47,302 homes and 61 affordable communities with 9,142 homes. Conventional and affordable operations generated 90% and 10%, respectively, of proportionate property NOI for the first half.
Financial performance and liquidity
Amounts below are in millions, except per-share data.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $246.4 | $241.7 | $495.3 | $479.2 |
| Operating income | $65.8 | $58.7 | $131.1 | $111.4 |
| Income from continuing operations | $17.9 | $2.5 | $30.0 | $0.8 |
| Net income | $84.6 | $7.0 | $166.1 | $9.8 |
| Net income attributable to Aimco common stockholders | $75.0 | $10.1 | $139.2 | $15.2 |
| Diluted earnings per common share | $0.51 | $0.07 | $0.95 | $0.10 |
| Dividends declared per common share | $0.26 | $0.24 | $0.52 | $0.48 |
- Sales and earnings quality: Dispositions generated after-tax gains of $66.7 million in Q2 and $136.2 million in the first half. These gains were the principal reason reported net income rose sharply year over year; they are not recurring property operating earnings.
- Property operations: Conventional same-store NOI increased 5.9% in Q2 and 5.8% in the first half. Q2 same-store revenue rose 4.1%, while expenses increased 0.7%. Average daily occupancy improved to 96.0% from 95.6% a year earlier. Affordable NOI was nearly flat in Q2 (+0.2%) and down 1.2% for the first half, partly reflecting higher utilities.
- Cash flow: First-half operating cash flow was $144.3 million, down from $173.0 million. Investing used $61.3 million, versus $266.8 million in the prior-year period; financing used $104.9 million, compared with $56.3 million provided in 2013. Capital expenditures were $182.4 million.
- Balance sheet: Total indebtedness was $4.206 billion, down from $4.388 billion at year-end 2013. Cash and cash equivalents were $33.8 million; restricted cash was $223.6 million. Total assets were $6.079 billion and total liabilities were $4.650 billion.
- Debt and access to liquidity: About 93% of leverage consisted of property-level, non-recourse debt and about 6% of perpetual preferred equity. Property debt was 97% fixed-rate, with an 8.2-year weighted-average maturity. The $600 million revolving facility had $53.4 million drawn and $502.1 million of remaining capacity after letters of credit. Covenant ratios exceeded stated minimums at quarter-end.
- Management’s leverage measures: Trailing-twelve-month debt to Adjusted EBITDA was 6.8x, down from 7.8x; debt and preferred equity to Adjusted EBITDA was 7.3x versus 8.0x. Coverage of interest and preferred dividends was 2.5x versus 2.4x.
Material changes versus the prior comparable period
- Higher rents, occupancy, and redevelopment contributions lifted conventional same-store and total conventional NOI. Q2 new and renewal lease rates together were 4.9% above expiring rents.
- Aimco sold 11 consolidated communities with 3,733 homes in the first half, generating $136.2 million of after-tax disposition gains. Six communities were sold in Q2. Six properties with 224 units were classified as held for sale at June 30.
- Operating cash flow declined year over year, which the company attributed primarily to working-capital needs and lower portfolio NOI following property sales. Cash declined from $55.8 million at year-end to $33.8 million, while restricted cash increased.
- Aimco issued preferred securities, including 5 million shares of 6.875% Class A preferred stock for $120.8 million net proceeds and $3.0 million from Class Z preferred shares issued through an at-the-market program. Proceeds were contributed to the Operating Partnership and used primarily to repay revolving-credit borrowings. Aimco also repurchased $9.5 million of preferred stock.
- Effective January 1, 2014, Aimco adopted revised discontinued-operations accounting prospectively for eligible disposals. Routine community sales are generally no longer presented as discontinued operations, reducing comparability with 2013; the 2014 disposition gains appear separately from continuing operations.
Outlook, commentary, risks and unusual items
- Management expected 2014 conventional redevelopment and development investment of approximately $200 million to $230 million. About $140 million of remaining planned investment was expected to be funded by committed construction loans, with the balance from property sales and operating cash flow.
- Capital commitments for development, redevelopment, and improvements totaled approximately $237.7 million at June 30; about half was expected to be incurred over the next 12 months. Management expected further property-debt prepayments during the remainder of 2014, including approximately $3.5 million of prepayment penalties.
- Management’s strategy included selling affordable communities over the next four to five years and reinvesting proceeds in the conventional portfolio. No full-year earnings or revenue guidance is provided in the supplied filing text.
- Key risks include financing availability and cost, covenant compliance, real-estate market and occupancy conditions, operating-cost inflation, project cost/timing and leasing execution, severe weather, litigation, environmental liabilities, and maintaining REIT qualification. Management reported no material change to the risk factors in the 2013 Form 10-K and expected continued covenant compliance during 2014.
- Winter-weather-related casualty losses increased by $1.3 million in Q2 and $4.3 million in the first half, primarily in the Northeast and Midwest. Other expense also rose, partly due to partnership-related reserves and severance costs.
- The company reported construction and redevelopment commitments, tax-credit compliance obligations, and ordinary-course legal matters. It did not anticipate material tax-credit refunds or a material effect from the IRS audit of 2011–2012 tax years; the settlement of an earlier tax dispute had no material financial effect.
Important facts for investors to verify
- Separate recurring property performance from disposition gains when assessing earnings and compare reported results in light of the changed discontinued-operations presentation.
- Track same-store rent growth, occupancy, utility and tax costs, and affordable-segment NOI for evidence that operating trends persist.
- Monitor cash conversion, restricted-cash availability, remaining credit-facility capacity, debt maturities, covenant headroom, and progress toward management’s leverage targets.
- Check redevelopment and development spending against budgets, schedules, expected occupancy, and projected returns, particularly for Lincoln Place, The Preserve at Marin, and One Canal Street.
- Assess whether planned asset sales and reinvestment, preferred-equity costs, and capital requirements support sustainable common dividends and long-term value creation.