Business context and reporting period
Apartment Investment and Management Company (Aimco) and AIMCO Properties, L.P. filed a combined Form 10-K for the fiscal year ended December 31, 2018. Aimco is a REIT; the operating partnership owns and operates the business. At year-end, the portfolio comprised 134 apartment communities and 36,549 homes, with approximately 99% average economic ownership.
Financial and operating performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $972.4 million | $1,005.4 million |
| Consolidated net income | $716.6 million | $347.1 million |
| Net income attributable to Aimco common stockholders | $656.6 million | $306.9 million |
| Diluted EPS | $4.21 | $1.96 |
| Operating cash flow | $396.4 million | $392.1 million |
| Cash, cash equivalents and restricted cash at year-end | $72.6 million | $142.5 million |
| Total indebtedness | $4.08 billion | $3.86 billion |
| Dividends/distributions declared per common share/unit | $1.52 | $1.44 |
- Revenue fell 3.3%, while consolidated net income more than doubled, chiefly because gains on dispositions rose to $677.5 million from $300.8 million. This included a $500.3 million gain from the sale of the Asset Management business and Hunters Point communities.
- Same Store NOI increased 3.1%; revenue rose 3.1% and expenses rose 3.3%. Average daily occupancy was 96.5%, up 50 basis points. Renewal and new-lease rent increases averaged 4.5% and 1.5%, respectively.
- Same Store NOI margin was 74.2%. Management reported 72% NOI margin and 67% Free Cash Flow margin for the overall Real Estate portfolio. These are company-defined measures.
- FFO per diluted share was $2.55; Pro forma FFO was $2.47, up 0.8%; and AFFO was $2.16, up 1.9%. These non-GAAP measures are not substitutes for GAAP results.
- Net cash provided by investing activities was $121.8 million, reflecting disposition proceeds partly offset by acquisitions and capital spending. Financing activities used $588.2 million. Real Estate capital additions were $338.8 million.
- Year-end revolving-credit availability was $632.5 million, in addition to $36.9 million cash and $35.7 million restricted cash. Unencumbered communities had estimated fair value of $2.7 billion.
- Property debt was primarily non-recourse and long-dated; 93.4% was fixed-rate, with an 8.0-year weighted-average maturity. Fixed-rate property debt had a 4.22% weighted-average rate. Proportionate debt and preferred equity to Adjusted EBITDA was 7.2x, above the company’s below-7.0x target; coverage including preferred dividends was 3.4x, above its 2.5x minimum target.
Material changes versus the prior comparable period
- GAAP earnings increased substantially on disposition gains, although revenue declined. Pro forma FFO and AFFO per share grew modestly.
- Aimco sold its Asset Management business and four Hunters Point communities in 2018, receiving $512.2 million net proceeds. It also sold four other apartment communities for $242.3 million gross proceeds and acquired six communities for approximately $483.1 million.
- Debt increased by approximately $213.9 million year over year. Aimco repurchased 8.7 million shares for $394.1 million, partly funded with revolving-credit borrowings; it also repaid a $250 million term loan.
- Same Store NOI growth moderated from 4.0% in 2017 to 3.1% in 2018, while occupancy improved and lease rent growth remained positive.
- Fourth-quarter revenue was $232.0 million versus $255.2 million a year earlier; net income was $9.8 million versus $286.2 million, and diluted EPS was $0.03 versus $1.67. The prior-year quarter included significant disposition-related earnings; quarterly results were uneven during 2018.
Outlook, commentary, risks and unusual items
- Management expected 2019 redevelopment and development spending of $225–$275 million. At year-end, planned and potential projects represented $571.2 million of estimated net investment, of which $361.0 million had been funded; projected weighted-average NOI yield was 6.1%, assuming untrended rents.
- Management targeted reducing the proportionate debt-and-preferred-equity leverage ratio to 6.9x by year-end 2019. It expected a regular 2019 quarterly cash dividend of $0.39 per share, a 3% increase from 2018, and declared a special dividend payable in cash and shares, alongside a reverse stock split.
- Key risks include apartment supply and competition, local economic and rent pressures, redevelopment cost/timing and lease-up uncertainty, debt refinancing and interest-rate exposure, insurance and severe weather, environmental liabilities, and maintaining REIT qualification. A 100-basis-point increase in 30-day LIBOR was estimated to reduce annual net income attributable to common holders by about $4.2 million.
- Environmental discussions and remediation matters involving formerly owned properties remained unresolved; management did not expect them to materially affect consolidated results or cash flows. The filing also identifies construction commitments of approximately $207 million, most expected within 12 months.
- Refinancing generated $14.9 million of debt prepayment penalties; the company reported $4.0 million of casualty losses. The 2018 valuation-allowance release and disposition gains are notable contributors to reported earnings.
- Auditors issued unqualified opinions on the financial statements and internal controls; management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- How much of 2018 GAAP earnings and cash available for distributions depended on asset-sale gains, tax benefits, and other nonrecurring items.
- Whether Same Store rent growth, occupancy, expense trends, and modest per-share AFFO growth can be sustained amid local supply and market changes.
- Progress on the 2019 leverage target, planned asset sales, share-repurchase funding, and refinancing maturities and costs.
- Whether redevelopment spending, projected yields, construction schedules, and lease-up assumptions are achieved, including the expected 2019 acquisition of One Ardmore.
- The final cash-versus-stock special-dividend outcome and related tax, share-count, and reverse-split effects.
- Developments in environmental matters, construction commitments, and other contingencies, and any changes in REIT compliance or debt-covenant headroom.