Business Context and Reporting Period
Company: Apartment Investment & Management Company (Aimco)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2003
Business Overview: Aimco is a Real Estate Investment Trust (REIT) owning and operating a geographically diversified portfolio of apartment properties. As of June 30, 2003, the Company owned a controlling interest in 182,566 units across 713 properties and managed an additional 53,576 units for third-party owners. The Company also operates an investment management business providing services to unconsolidated real estate partnerships.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2003 |
Six Months Ended June 30, 2002 |
|---|---|---|
| Revenue | $748,152 | $639,659 |
| Net Income | $81,053 | $116,092 |
| Net Income Attributable to Common Stockholders | $36,106 | $66,718 |
| Earnings Per Share (Diluted) | $0.39 | $0.82 |
| Funds From Operations (FFO) - Diluted | $202,104 | $268,323 |
| Adjusted Funds From Operations (AFFO) | $140,503 | $196,518 |
| Net Cash Provided by Operating Activities | $271,641 | $266,892 |
| Total Assets | $10,234,788 | $10,316,601 |
| Total Indebtedness | $6,070,104 | $6,143,971 |
| Cash and Cash Equivalents | $105,915 | $99,553 |
Material Changes vs. Prior Period
- Revenue Growth: Rental and other property revenues increased 17.0% to $748.2 million, driven primarily by $71.6 million from newly consolidated properties and $65.2 million from acquisition properties. This growth was partially offset by a 5.1% decrease in same-store property revenues due to lower occupancy and average rents.
- Net Income Decline: Net income decreased 30.2% to $81.1 million. This decline was largely due to a significant reduction in gains from discontinued operations (a $34.2 million gain in 2003 vs. a $4.8 million loss in 2002) and lower accretion income from notes receivable ($2.5 million in 2003 vs. $15.5 million in 2002).
- Operating Expenses: Property operating expenses increased 33.2% to $332.8 million, primarily due to the inclusion of newly consolidated and acquired properties. Same-store operating expenses increased 9.3% due to higher utility costs, contract services, and turnover costs.
- Discontinued Operations: The Company recognized a $34.2 million income from discontinued operations, primarily driven by a $36.1 million net gain on dispositions of real estate, compared to a $10.5 million loss in the prior year.
- Capital Structure: The Company issued $100 million of Class S Cumulative Redeemable Preferred Stock and redeemed $60 million of Class C Preferred Stock. Total indebtedness decreased slightly to $6.07 billion.
Guidance, Outlook, Risks, and Unusual Items
- Dividend Policy: The dividend declared for August 2003 was $0.82 per share. Management targets a dividend payout of approximately 83% of FFO and 106% of AFFO (before capital enhancements) for the trailing 12 months. The Board reviews the dividend quarterly with a goal of annual increases.
- Liquidity and Capital Resources: The Company maintains a $500 million revolving credit facility (with $445 million available as of June 30, 2003) and recently secured a $250 million term loan. Management expects to fund future needs through property sales, refinancing, and operating cash flows.
- Legal Proceedings:
- NAPICO Litigation: A judgment of approximately $92.5 million (plus interest and punitive damages) was entered against NAPICO (acquired in the Casden Merger) for securities violations and breach of fiduciary duty. The Company is pursuing a settlement and believes the former Casden shareholders are responsible for the liability.
- Insurance Disputes: Ongoing litigation regarding insurance coverage and premium funding defaults involving National Union Fire Insurance Company and Cananwill, Inc. The Company does not expect a material adverse effect.
- Mold Liability: The Company faces potential liability regarding mold exposure claims but has limited insurance coverage. No material costs have been incurred to date.
- Unusual Items:
- Tax Benefit: An $8.0 million deferred tax benefit was recognized in Q1 2003 due to the reversal of a valuation reserve, increasing net income by approximately $7.1 million.
- Accounting Changes: The Company adopted SFAS 123 for stock-based compensation and SFAS 150 for mandatorily redeemable preferred securities, resulting in the reclassification of $115.2 million of preferred securities to liabilities effective July 1, 2003.
Investor Verification Checklist
- Same-Store Performance: Verify the sustainability of the 5.1% decline in same-store revenues and the 9.3% increase in same-store operating expenses, as these indicate underlying operational headwinds despite portfolio growth.
- Discontinued Operations Volatility: Assess the reliance on gains from property dispositions (discontinued operations) to support net income, as these are non-recurring and vary significantly year-over-year.
- Debt Maturities: Review the $130.7 million in scheduled debt maturities for the remainder of 2003 and the Company's ability to refinance these obligations in the current interest rate environment.
- Legal Contingencies: Monitor the resolution of the NAPICO litigation and insurance disputes, as the potential liabilities, while currently deemed non-material by management, could impact future cash flows.
- Preferred Stock Redemptions: Confirm the execution of the announced redemptions of Class D, H, L, and M preferred stock in August 2003 and the impact on the Company's capital structure.