APARTMENT INVESTMENT & MANAGEMENT CO quarterly report, Q3 FY2010

Business context and reporting period

Apartment Investment and Management Company (Aimco), a self-managed REIT, filed this unaudited Form 10-Q for the quarter ended September 30, 2010. Its portfolio comprised 227 conventional properties with 70,844 units and 251 affordable properties with 29,097 units; it also managed or provided services for 27,357 units. Aimco’s strategy emphasizes portfolio optimization and non-recourse, long-dated property debt.

Financial performance and position

FFO and Pro forma FFO are non-GAAP measures; the filing cautions that they are not substitutes for GAAP income or operating cash flow. Common dividends declared were $0.10 per share in Q3 and $0.20 per share for the nine-month period.

• Property operations: Q3 total real estate operating net operating income (NOI) was $154.4 million, up 8.9%. Conventional same-store NOI rose 2.6% year over year in Q3 but declined 1.4% for the first nine months. Average conventional same-store occupancy was 96.0%; conventional portfolio rents averaged $1,044 per month and the stated operating margin was 62%. Affordable segment NOI increased, but comparisons were affected by newly consolidated entities.
• Cash flow, nine months: Operating activities provided $190.2 million, investing activities provided $41.5 million, and financing activities used $167.9 million. Cash and cash equivalents ended at $145.1 million, up $63.8 million from year-end 2009; restricted cash was $216.4 million.
• Debt and liquidity: Total indebtedness was $5.54 billion at September 30, compared with $5.54 billion at December 31, 2009; total assets were $7.62 billion. The company reported no term loans outstanding. It said about 90% of property-level debt was fixed rate and about 85% of leverage was property-level non-recourse debt. The revolving facility was increased to $300 million; $258.7 million remained available after letters of credit. Covenant ratios were 1.58x for EBITDA to debt service and 1.34x for earnings to fixed charges, against minimums of 1.40x and 1.20x, respectively.
• Debt fair value: Estimated fair value of consolidated debt, including debt classified with assets held for sale, was approximately $6.0 billion versus carrying value of $5.5 billion.

Material changes versus prior comparable periods

• Q3 revenue increased 2.4% and operating income more than doubled, while common-stockholder loss narrowed to $28.5 million from $40.5 million. Nine-month common-stockholder loss also narrowed, to $86.9 million from $108.1 million.
• Improved property NOI and lower corporate expenses supported results. Lower gains from property dispositions reduced discontinued-operations income: $19.7 million for Q3 2010 versus $45.4 million a year earlier, and $68.5 million versus $86.3 million for the first nine months.
• Property sales slowed: Aimco sold 31 consolidated properties in the first nine months of 2010, compared with 57 in the same 2009 period. Assets held for sale fell to one property with 164 units from 32 properties with 5,212 units at year-end 2009.
• Cash from operations increased $52.8 million year over year, while investing cash generation fell sharply, reflecting substantially lower property-disposition proceeds than in 2009.

Outlook, commentary, risks and unusual items

• No formal earnings or financial guidance is provided in the supplied filing text. Management expected property sales to continue declining during the remainder of 2010, noting that sales completed through July had enabled repayment of the remaining term debt. Management also highlighted high conventional occupancy and ongoing efforts to simplify operations and reduce transactional activity and overhead.
• In September 2010, Aimco issued 4.0 million shares of 7.75% Class U preferred stock for net proceeds of $96.1 million. Subsequent to quarter-end, on October 7, it redeemed all 4.05 million shares of 9.375% Class G preferred stock for $101.3 million plus $2.2 million of accrued dividends.
• Adoption of revised VIE accounting guidance led to consolidation of approximately 49 previously unconsolidated partnerships, and deconsolidation of others. This changed reported assets, liabilities, revenue and segment comparability; the company recorded a $37.3 million cumulative-effect charge to Aimco equity. Management said related later-period adjustments had no significant effect on Aimco-attributable results.
• Real estate held for sale was written down by $8.3 million during the first nine months. Q3 also included a $9.8 million reduction in certain tax-credit partnership investment balances, with substantially all related equity losses attributed to noncontrolling interests.
• Key risks include apartment demand, rents and occupancy; operating-cost and real-estate-tax pressures; property values and financing availability; debt covenant compliance; interest-rate and swap exposure; environmental liabilities; regulation and litigation; and maintaining REIT status. A 1 percentage-point LIBOR increase was estimated to reduce annual income attributable to common stockholders by about $0.2 million under the stated assumptions. The filing reported no material change to annual-report risk factors and no material adverse effect expected from the described IRS proposed adjustments.
• Aimco disclosed a possible West Harlem property put: depending on specified thresholds, it could require a cash payment of $30.6 million to $97.7 million and assumption of $118.6 million in property debt; Aimco also committed to an additional $4.0 million of loans. The remaining potential CRA preferred-stock repurchase obligation was $20.0 million in liquidation preference.

Important facts for investors to verify

1. How much of the reported NOI improvement reflects underlying same-store performance versus VIE consolidation, tax appeals and other one-time or non-comparable items.
2. Debt maturities, facility extension conditions, covenant headroom and the availability and cost of refinancing; also review the fair-value premium over debt carrying value.
3. The status and potential cash exposure of the West Harlem put and remaining CRA preferred-stock repurchases.
4. Whether property-sale proceeds, cash from operations and liquidity are sufficient to fund capital spending, debt service and dividends as dispositions decline.
5. The effect of the Class U issuance and post-quarter Class G redemption on preferred dividends, common-stockholder earnings and future cash requirements.