APARTMENT INVESTMENT & MANAGEMENT CO quarterly report, Q3 FY2012

Apartment Investment & Management Co. (Aimco) — Q3 2012 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2012. This combined filing covers Aimco, a REIT, and its operating partnership. Aimco owned approximately 94.8% of the partnership’s common units. The business owns, manages and redevelops apartment properties in the United States.

Key financial results

Metric	Q3 2012	Q3 2011	Nine months 2012	Nine months 2011
Total revenue	$267.4 million	$254.5 million	$787.8 million	$753.9 million
Operating income	$50.7 million	$41.4 million	$144.1 million	$121.8 million
Net income (loss) attributable to Aimco common stockholders	$24.2 million	$(14.8) million	$14.1 million	$(79.8) million
Diluted earnings (loss) per common share	$0.17	$(0.12)	$0.11	$(0.67)
Operating cash flow	Not stated separately	Not stated separately	$242.3 million	$176.4 million

Q3 revenue increased 5.1% year over year; nine-month revenue rose 4.5%. Q3 operating income grew about 22%.
Results include substantial disposition-related income: discontinued operations contributed $48.8 million in Q3 and $121.9 million for the nine months. Nine-month discontinued operations included $139.9 million of property-sale gains before related tax and other effects. Thus reported net income was materially supported by property dispositions, rather than solely by ongoing operations.
Same-store property performance improved. Q3 total same-store revenue rose 4.8%, expenses 1.3%, and NOI 6.9%; operating margin increased to 63.8% from 62.6%. Conventional same-store NOI increased 7.4% in Q3 and 6.7% for the nine months.
Aimco reported FFO attributable to common stockholders of $54.8 million in Q3 and $151.5 million for the nine months; Pro forma FFO was $66.1 million and $172.7 million, respectively. These are non-GAAP measures and should be read alongside GAAP results.

Financial position, cash flow and capital

At September 30, 2012, total assets were $6.57 billion and reported indebtedness was $4.94 billion, including $66.2 million drawn on the revolving facility. The balance sheet separately reported $46.7 million of liabilities related to assets held for sale, including $46.4 million of property debt.
Cash and cash equivalents were $102.5 million; restricted cash was $158.6 million. The $500 million revolving credit facility had $406.8 million of borrowing capacity available after borrowings and letters of credit.
Nine-month operating cash flow was $242.3 million. Investing activities provided $36.2 million net, including $285.2 million of property-disposition proceeds, offset in part by $188.4 million of capital expenditures. Financing activities used $267.1 million.
Capital expenditures increased to $188.4 million from $118.4 million in the prior-year period. The company paid $0.20 per common share in Q3 dividends; nine-month declared dividends were $0.56 per share.
Two common-stock offerings generated $594.4 million net proceeds; proceeds were used primarily to redeem $600.9 million of preferred stock. Aimco also issued $9.8 million of 7.00% Class Z preferred stock. Common shares outstanding increased to approximately 145.6 million at quarter-end from 120.9 million at year-end 2011.

Changes, outlook and notable items

Management attributed improved year-over-year results to stronger property NOI, higher disposition gains and, for the nine-month period, lower interest expense. The prior year included $20.7 million of refinancing prepayment penalties and $2.3 million of deferred loan-cost write-offs that did not recur.
During the first nine months, Aimco sold or disposed of interests in 50 consolidated properties, versus 39 a year earlier. It had five properties with 625 units classified as held for sale at September 30, compared with 55 properties and 8,470 units at December 31, 2011.
Management planned approximately $100 million of redevelopment investment in 2012 across ten properties; construction was underway at nine at quarter-end. It expected to invest approximately $400 million over several years in these projects, with projected initial cash returns above 7% and free-cash-flow internal rates of return above 10%, excluding market rent growth. These are management projections, not guarantees. A broader Lincoln Place redevelopment began after quarter-end and was expected to take about two years.
Management expected to sell essentially all affordable properties over the next four to five years and reinvest proceeds in the conventional portfolio. It also stated that leverage targets were expected to be reached by early 2014, two years earlier than previously anticipated.
Leverage remained above stated targets: trailing-twelve-month debt and preferred equity to EBITDA was 8.1x versus a target below 7.0x; interest and preferred-dividend coverage was 2.2x versus a target above 2.5x. Credit-facility covenant ratios were 1.63x debt-service coverage against a 1.50x minimum and 1.44x fixed-charge coverage against a 1.30x minimum. Management expected continued covenant compliance through the remainder of 2012.

Risks and contingencies

Key risks include apartment demand, rents and occupancy; local employment and supply; operating costs and property taxes; financing availability and interest rates; debt-covenant compliance; execution and pricing of acquisitions, sales and redevelopment; regulatory and REIT requirements; litigation; severe weather; and environmental liabilities. The filing reported no material changes to the risk factors in the 2011 Form 10-K.
Approximately 96% of property-level debt was fixed-rate, and its weighted-average maturity was 7.7 years. A 100-basis-point increase in 30-day LIBOR was estimated to reduce annual net income attributable to Aimco common stockholders by about $2.3 million, subject to the stated assumptions and potential offsets from variable-rate assets.
Interest-rate swap arrangements included $20.0 million of cash collateral; specified loan-to-value terms could require additional collateral or debt repayment. The company also disclosed $61.3 million of construction commitments, mostly expected within 12 months, and a potential West Harlem property put that could require about $31.0 million cash plus assumption of approximately $118.2 million of property debt if specified rent conditions are met.
Management stated that ordinary-course legal matters were not expected to have a material adverse effect. It did not anticipate material tax-credit investor refunds or reductions. The IRS issued a final partnership administrative adjustment concerning the 2006 and 2007 tax returns; Aimco did not expect a material effect.

Important facts for investors to verify

How much of earnings and FFO growth reflects recurring property operations versus sales, discontinued operations and other nonrecurring items.
Whether same-store rent, occupancy and expense trends persist, particularly given the nine-month 20-basis-point decline in conventional same-store occupancy.
Progress toward leverage and coverage targets, covenant headroom, and the availability and cost of refinancing or other funding.
Actual redevelopment spending, completion timing, achieved returns and the execution of the planned affordable-property exits.
The effect of equity issuance and preferred-stock redemptions on per-share results, distributions and the company’s capital structure.