Apartment Investment and Management Company (Aimco) — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statement amounts are consolidated for Aimco and AIMCO Properties, L.P. unless otherwise noted.
Business context
Aimco is a REIT focused on owning, operating, redeveloping and selectively developing apartment communities. At quarter-end, its Real Estate portfolio included interests in 138 communities with 37,897 homes. Aimco owned 94.6% of the Operating Partnership’s common units.
Financial and operating performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $250.2 million | $249.1 million | $497.9 million | $495.6 million |
| Operating income | $49.4 million | $59.7 million | $102.7 million | $117.5 million |
| Net income attributable to Aimco common stockholders | $2.8 million | $15.8 million | $84.3 million | $27.3 million |
| GAAP diluted earnings per common share | $0.02 | $0.10 | $0.54 | $0.17 |
| Pro forma FFO per diluted share | $0.61 | $0.61 | $1.21 | $1.19 |
| AFFO per diluted share | $0.54 | $0.51 | $1.07 | $1.02 |
- Q2 Same Store NOI increased 3.2%: revenue rose 3.2%, while expenses increased 3.3%. Average daily occupancy was 96.3%, up 40 basis points year over year. Renewal and new-lease rent increases were 4.8% and 1.9%, respectively.
- For the six months, net income benefited from a $41.8 million income tax benefit and $50.5 million gain on real estate dispositions, compared with $10.0 million and $1.1 million, respectively, in 2017. These items make the year-over-year GAAP earnings increase an incomplete indicator of recurring performance.
- Q2 common dividends declared were $0.38 per share, versus $0.36 a year earlier; six-month dividends were $0.76 versus $0.72.
Cash flow, debt and liquidity
- Six-month operating cash flow was $185.6 million, compared with $177.5 million. Investing cash outflow was $293.7 million, including real estate purchases and capital expenditures of $164.1 million. Financing provided $104.5 million. Cash, cash equivalents and restricted cash declined $3.6 million to $138.9 million.
- At June 30, total assets were $6.54 billion and total liabilities were $4.79 billion. Real Estate portfolio indebtedness was $4.26 billion, including $3.79 billion of non-recourse property debt, a $249.8 million term loan and $220.2 million drawn on the revolver. Debt of partnerships managed through Asset Management was separately presented as held for sale.
- Quarter-end cash and restricted cash were $87.8 million, with $367.5 million of available revolver capacity. The company reported approximately $2.0 billion of unencumbered apartment communities. Its disclosed post-sale pro forma liquidity was approximately $207 million of additional cash and $592.9 million of revolver capacity.
- Management reported pro forma debt and preferred equity to EBITDA of 6.9x and adjusted EBITDA to interest and preferred dividends of 3.1x. It targeted the former below 7.0x and the latter above 2.5x, and expected debt-to-EBITDA ratios of 6.3x and 6.7x, respectively, before year-end. Both cited credit agencies rated Aimco BBB- with a stable outlook.
- Approximately 96.5% of property-level debt was fixed-rate; its weighted-average maturity was 7.0 years. The fixed-charge coverage ratio was 2.00x against a 1.40x covenant minimum.
Material changes and transactions
- Revenue was broadly flat year over year, while operating income and Q2 GAAP earnings declined. Higher depreciation and amortization, general and administrative costs, and interest expense contributed to the pressure. Q2 Pro forma FFO per share was unchanged; AFFO per share rose 6%, which management attributed in part to lower capital-replacement spending.
- During the first half, Aimco acquired Bent Tree Apartments for $160 million and four Philadelphia-area communities for total consideration including $208.9 million of assumed property debt and 1.2 million newly issued OP units. Two further Philadelphia acquisitions remained pending: one required city approval and another was expected after construction completion in 2019.
- After quarter-end, Aimco sold its Asset Management business and four affordable communities for $590 million, yielding approximately $512 million net, and sold Chestnut Hill Village for $170.4 million gross and $165.5 million net. Proceeds were used to repay the term loan and revolver; management said remaining funds were intended for property debt reduction and redevelopment. These were post-quarter transactions.
Outlook, risks and unusual items
- Management expected 2018 redevelopment and development spending of $120 million to $200 million. Potential net investment in current projects was $519.8 million, of which $313.6 million had been funded, with a projected weighted-average NOI yield of 6.1% on untrended rents.
- Capital enhancement spending was expected to total $80 million to $100 million for 2018. Management described no planned near-term equity issuance.
- Key risks identified include apartment supply, rent and occupancy trends, operating-cost inflation, access to financing and covenant compliance, severe weather and insurance costs, legal and regulatory matters, environmental remediation, and continued REIT qualification. Management said risk factors were not materially changed from the 2017 Form 10-K.
- Commitments for redevelopment, development and capital improvements totaled approximately $118 million, mostly expected within 12 months. The filing describes ongoing Airbnb litigation and environmental matters in Indiana and Lake Tahoe; management did not expect these matters to have a material adverse effect, but outcomes remain uncertain.
- Management attributed part of the increase in first-half earnings to tax and disposition effects. It also reported Q2 severance costs connected with the subsequent Asset Management sale and elevated legal costs related in part to the Airbnb litigation.
Important facts for investors to verify
- Reconcile recurring operating trends with reported GAAP earnings, especially the first-half tax benefit and disposition gains, and review the definitions and reconciliations for Pro forma FFO and AFFO.
- Confirm the final proceeds, debt repayments and use of remaining funds from the July 2018 sales, and assess the resulting leverage and liquidity.
- Track completion and approval of the remaining Philadelphia acquisitions and compare realized returns with management’s projected yields.
- Monitor redevelopment budgets, timing, lease-up and projected yields, as well as the $118 million of capital-related commitments.
- Review developments in the Airbnb litigation and environmental matters, and assess their potential effects despite management’s stated view that they are not expected to be material.