Business context and reporting period
Apartment Investment and Management Company (Aimco), a REIT, and its operating partnership filed a combined Form 10-K for the fiscal year ended December 31, 2013. Aimco owns and operates a U.S. apartment portfolio focused on coastal and job-growth markets. At year-end, the portfolio included 236 communities and 60,553 homes; conventional operations generated 90% of proportionate property NOI and affordable operations 10%. Management expects to sell its affordable communities over the next four to five years and reinvest the proceeds in conventional properties.
Financial performance and position
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $974.1 million | $958.5 million |
| Operating income | $249.0 million | $179.0 million |
| Operating margin | 25.6% | 18.7% |
| Income (loss) from continuing operations | $34.6 million | $(18.8) million |
| Net income attributable to Aimco common stockholders | $203.7 million; $1.40 per share | $82.1 million; $0.61 per share |
| Cash from operating activities | $325.6 million | $316.8 million |
| Cash and cash equivalents | $55.8 million | $84.4 million |
| Total indebtedness | $4.388 billion | $4.413 billion |
FY 2013 common dividends were $0.96 per share, up from $0.76. Capital expenditures were $350.3 million, exceeding operating cash flow. Aimco reported $127.0 million of restricted cash in addition to cash and cash equivalents. The $600 million revolving credit facility had $50.4 million drawn and $505.0 million of remaining capacity, net of letters of credit.
Conventional same-store revenue increased 4.4% and same-store NOI increased 5.1%; average daily occupancy was 95.4%, versus 95.6% in 2012. Affordable segment NOI rose 1.4%. Pro forma FFO per diluted share increased 11% and AFFO per diluted share increased 14%, according to management; both are non-GAAP measures.
Fourth-quarter results
Q4 2013 revenue was $250.9 million, operating income $73.2 million, income from continuing operations $26.8 million, and net income attributable to common stockholders $122.0 million, or $0.84 per share. Discontinued operations contributed $121.8 million of net income in the quarter.
Material changes versus the prior comparable period
- Annual revenue increased 1.6%, while operating income rose about 39%, supported by improved property results and lower depreciation and amortization.
- Common-stockholder net income rose substantially, but results were significantly affected by property sales: 2013 discontinued operations included $212.5 million of real-estate disposition gains before related taxes and allocations.
- Aimco sold 29 communities in 2013 for aggregate sales proceeds of $515.8 million, reporting net proceeds of $233.1 million and a net gain of approximately $200.6 million after related income taxes. The 2012 comparison included 75 property sales and approximately $223.8 million of net gains.
- Interest expense increased $7.7 million year over year, while depreciation and amortization declined $33.3 million. Capital expenditures increased from $270.2 million to $350.3 million, largely reflecting redevelopment and development activity.
Outlook, risks and unusual items
- Management expects to invest approximately $185 million to $220 million in conventional redevelopment and development during 2014. For One Canal Street in Boston, total expected investment is approximately $190 million over two and a half years, including $60 million to $70 million expected in 2014; a $114 million construction loan is part of the funding plan.
- Management’s leverage targets are debt and preferred equity to adjusted EBITDA below 7.0x and adjusted EBITDA coverage of interest and preferred dividends above 2.5x. At year-end, annualized Q4 ratios were 7.2x and 2.6x, respectively. Property debt had an 8.2-year weighted-average maturity; 1.9% of unpaid principal was due in 2014 and approximately 97% was fixed-rate.
- Credit Agreement debt-service and fixed-charge coverage ratios were 1.77x and 1.72x, above covenants of 1.50x and 1.30x. Management expected covenant compliance during 2014.
- Key risks include substantial secured debt and refinancing needs; interest-rate and credit-market changes; construction cost, permitting, timing and lease-up risks; apartment supply, local employment and rent pressures; environmental, casualty and insurance exposures; and possible changes to affordable-housing subsidies or regulations.
- Government-agency rent subsidies included in rental revenue were $88.4 million in 2013, of which $78.1 million related to continuing operations. About 9% of the continuing-operations subsidy amount related to contracts that expired in late 2013 or expire in 2014; renewals were in process or anticipated.
- The company reported no material legal proceedings. It disclosed a settlement of a tax dispute concerning the operating partnership’s 2006 and 2007 tax years, which management said would not materially affect results or financial condition.
Important facts for investors to verify
- How much of reported earnings and quarterly results reflects disposition gains rather than recurring property operations; review continuing-operations results and non-GAAP FFO/AFFO reconciliations.
- Whether development and redevelopment spending meets budget, schedule, lease-up and return expectations, particularly for One Canal Street and active redevelopment projects.
- Progress toward leverage targets, covenant headroom, debt maturities, and continued availability of the revolving credit facility and property refinancing.
- Renewal outcomes for affordable-housing assistance contracts and the potential effect of any subsidy reductions on revenue and liquidity.
- Whether operating cash flow can support elevated capital spending, distributions and debt service; also review dividend assumptions, as the board’s 2014 dividend outlook was not a binding commitment.