Business Context and Reporting Period
Company: Apartment Investment & Management Company (AIMCO)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: AIMCO is a self-administered and self-managed Real Estate Investment Trust (REIT) engaged in the acquisition, ownership, management, and redevelopment of apartment properties. As of December 31, 2002, the Company was the largest owner and operator of apartment properties in the United States, owning or managing 1,788 properties containing 318,152 units across 47 states, the District of Columbia, and Puerto Rico.
Key Financial Metrics
| Metric | 2002 | 2001 |
|---|---|---|
| Net Income | $169.0 million | $107.4 million |
| Net Income Attributable to Common Stockholders | $75.5 million | $17.0 million |
| Earnings Per Share (Diluted) | $0.87 | $0.23 |
| Rental and Other Property Revenues | $1,405.7 million | $1,224.7 million |
| Income from Property Operations | $844.3 million | $758.9 million |
| Funds From Operations (FFO) - Diluted | $509.9 million | $532.3 million |
| Free Cash Flow | $802.3 million | $783.9 million |
| Total Assets | $10.3 billion | $8.3 billion |
| Total Indebtedness | $6.2 billion | $4.6 billion |
| Cash and Cash Equivalents | $99.6 million | $80.0 million |
Material Changes vs. Prior Period
- Acquisitions: The Company completed the Casden Merger in March 2002, acquiring 4,975 conventional and 11,027 affordable units for approximately $1.1 billion. In August 2002, it completed the New England Properties Acquisition, adding 4,323 units for $500 million. These acquisitions drove a 14.8% increase in rental revenues.
- Dispositions: AIMCO sold 87 properties (53 conventional, 26 affordable, 1 commercial, 7 senior living) for aggregate proceeds of $551.8 million. Net proceeds to the partnerships were $184.5 million, with the Company's share being $137.2 million.
- Operating Results: Net income attributable to common stockholders increased significantly from $17.0 million in 2001 to $75.5 million in 2002. This improvement was driven by acquisitions and a change in accounting estimates regarding the useful lives of real estate assets, which reduced depreciation expense by approximately $38.5 million.
- Same Store Performance: Same store net operating income decreased by 1.6% ($11.6 million) due to a 0.70% decrease in revenues (lower average rent and occupancy) and a 0.90% increase in operating expenses (higher property taxes and insurance).
- Debt Levels: Total indebtedness increased by $1.6 billion to $6.2 billion, primarily due to debt assumed in the Casden Merger ($684.7 million) and new financing for the New England acquisition ($308.7 million).
Guidance, Outlook, and Risks
- Dividend Policy: The Board declared a quarterly dividend of $0.82 per share for Q4 2002 (paid Feb 2003), maintaining the annualized rate of $3.28. The policy targets an annual increase equal to one-half of the projected increase in Adjusted Funds From Operations (AFFO).
- Capital Strategy: The Company aims to maintain a free cash flow to combined interest expense and preferred stock dividends ratio between 2:1 and 3:1. In 2002, this ratio was 1.81:1, below the target, due to the difficult national economy and weaker operations. The goal is to increase this to 2.2:1 over time.
- Future Capital Needs: The Company expects to fund future acquisitions and redevelopment through property sales, short-term borrowings, and operating cash flows. Approximately $34 million remains to be spent on 10 properties currently under redevelopment.
- Risks and Contingencies:
- Interest Rate Risk: Approximately 22.6% of debt ($1.4 billion) is variable rate. A 1% increase in interest rates would reduce annual income and cash flows by $14.1 million.
- Legal Proceedings: The Company is involved in litigation regarding the Casden Merger (NAPICO) where a jury returned verdicts totaling approximately $185 million against the former shareholders. AIMCO believes it has meritorious defenses and does not expect a material adverse effect.
- Environmental/Mold: Insurance coverage for mold-related claims has become more limited. While no material costs have been incurred to date, future liabilities could be significant.
- REIT Status: Failure to qualify as a REIT would subject the Company to corporate income tax and trigger repurchase obligations for preferred stock.
Key Facts for Investor Verification
- Debt Covenants: Verify compliance with the amended credit facility and Casden Loan covenants, specifically the fixed charge coverage ratio (reduced to 1.50:1 in Feb 2003) and debt-to-gross asset value ratio (max 0.55:1).
- Accounting Changes: Confirm the impact of the change in useful lives of real estate assets (extended from 25 to 30 years), which added approximately $74 million to net income in 2002.
- Discontinued Operations: Review the $6.1 million loss from discontinued operations in 2002, which included a $9.0 million net loss on disposals of senior living facilities and other non-strategic assets.
- Variable Rate Exposure: Assess the sensitivity of cash flows to interest rate hikes given the $1.4 billion in variable-rate debt, including tax-exempt bonds and the Casden Loan.
- FFO vs. Net Income: Note that while Net Income increased significantly, FFO (a key REIT metric) decreased slightly from $532.3 million in 2001 to $509.9 million in 2002, reflecting the impact of acquisitions and higher capital spending.