Business context and reporting period
Aimco (Apartment Investment and Management Company), together with its operating partnership, filed a combined audited Form 10-K for the year ended December 31, 2017. Aimco is a REIT focused on owning, operating, redeveloping, and selectively developing apartment communities. At year-end, it held interests in 182 communities with 43,802 homes, including 136 market-rate communities in its Real Estate portfolio and 46 low-income housing tax-credit communities served by its Asset Management business.
Financial results and key metrics
- Revenue: $1.005 billion, up 1.0% from $995.9 million in 2016.
- Net income: $347.1 million, down 28.2% from $483.3 million. Diluted earnings per common share were $1.96, versus $2.67. Net income included $299.6 million of after-tax gains on real estate dispositions.
- Operating performance: Real Estate same-store NOI increased 4.2%; same-store revenue rose 3.2%, while property operating expenses increased 0.7%. Renewal rent increases averaged 4.6%, new-lease increases 0.6%, and the weighted average rent increase was 2.5%. Portfolio NOI and Free Cash Flow margins were 69% and 64%, respectively.
- Funds from operations: Adjusted FFO (AFFO) increased 7.6% to $2.12 per diluted share; Pro forma FFO rose 5.6% to $2.45 per share.
- Cash flow and investment: Operating cash flow was $394.1 million, compared with $377.7 million in 2016. Investing activities provided $14.7 million, including $402.2 million of property-sale proceeds and $358.1 million of capital expenditures. Financing activities used $393.3 million.
- Debt and liquidity: Real Estate portfolio indebtedness was $3.862 billion, including a $250 million term loan and $67.2 million drawn on the revolver. Cash and cash equivalents were $60.5 million; restricted cash was $34.8 million; and unused revolver capacity was $521.3 million. Management reported $616.6 million of cash and restricted cash plus available revolver capacity. Unencumbered communities had estimated fair value of approximately $1.8 billion.
- Leverage and coverage: Proportionate debt and preferred equity to Adjusted EBITDA was 6.9x; Adjusted EBITDA to interest expense and preferred dividends was 3.1x. The credit-agreement fixed-charge coverage ratio was 2.01x, above the 1.40x covenant threshold.
- Dividends: Aimco declared $1.44 per common share for 2017, versus $1.32 in 2016. In January 2018, the board declared a quarterly dividend of $0.38 per share and anticipated similar quarterly dividends for the rest of 2018, subject to review.
Material changes versus prior period
- Reported net income declined mainly because after-tax disposition gains fell to $299.6 million from $393.8 million and depreciation and amortization increased by $33.1 million. Real Estate NOI growth and lower interest expense partly offset these effects.
- Same-store NOI growth moderated to 4.2% from 6.4% in 2016, as weighted average rent increases declined from 4.0% to 2.5%; expense growth also slowed.
- Asset Management contribution fell to $40.0 million from $48.8 million, principally due to lower tax-credit income. Aimco expects this contribution to decline as remaining tax credits are delivered and underlying properties are sold.
- Debt increased from $3.648 billion, in part reflecting the Palazzo joint-venture interest reacquisition and related financing. Aimco paid $311.0 million in cash and assumed $140.5 million of partner debt to acquire the remaining 47% interest for total consideration of $451.5 million.
- Capital additions for the Real Estate segment were $338.0 million, compared with $321.0 million in 2016. Redevelopment and development spending was $172.4 million.
Outlook, risks, contingencies, and unusual items
- Management expected 2018 redevelopment and development spending of $120 million to $200 million. The active pipeline had estimated net investment of $714.6 million, of which $513.1 million had been funded, and a projected weighted-average stabilized NOI yield of 6.1% assuming untrended rents. These are estimates, not guarantees.
- In January 2018, Aimco refinanced $111.5 million of 2018 property-debt maturities with ten-year fixed-rate, non-recourse debt. A separate $250 million variable-rate term loan matured June 30, 2018, with a one-year extension option.
- Interest-rate exposure included approximately $399.8 million of variable-rate debt. Management estimated that a 100-basis-point increase in 30-day LIBOR would reduce annual net income by about $3.8 million, partly offset by variable-rate cash balances.
- Aimco recorded a $35.8 million gross impairment related to the La Jolla Cove property after agreeing in January 2018 to sell its interests to settle litigation. The filing states that $25.6 million related to a deferred tax liability assumed by the buyer and that the remaining $10.2 million was offset economically by retained cash distributions and avoided litigation costs.
- Environmental matters included ongoing regulatory discussions and appeals concerning former properties in Indiana and Lake Tahoe. Management did not expect resolution to materially affect consolidated financial condition, results, or cash flows, but outcomes remain uncertain. Other ordinary-course legal matters were also disclosed.
- Principal business risks include apartment supply and competition, local economic conditions and rent growth, operating-cost inflation, redevelopment delays or cost overruns, financing availability and refinancing, interest rates, insurance and severe-weather losses, environmental liabilities, rent regulation, and continued REIT qualification.
- The December 2017 Tax Cuts and Jobs Act affected deferred-tax balances and tax-credit asset valuation; Aimco reported a $15.9 million tax-reform remeasurement benefit and a $15.4 million valuation allowance against certain tax-credit deferred assets. Management said its accounting for the law was not complete.
- Management reported effective disclosure controls and internal control over financial reporting. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile reported earnings with AFFO and FFO, particularly the effects of property-sale gains, depreciation, and the La Jolla Cove impairment.
- Check the subsequent use of property-sale proceeds, the completed refinancing of 2018 maturities, and repayment or extension of the $250 million term loan.
- Track same-store rent growth, occupancy, expenses, and NOI as new apartment supply and market conditions change.
- Monitor redevelopment budgets, completion and lease-up schedules, and whether projected yields are achieved.
- Review the trajectory of Asset Management tax-credit income, environmental proceedings, and REIT and tax-credit compliance.
- Assess dividend coverage using AFFO and liquidity needs, and distinguish unrestricted cash from restricted cash and revolver availability.