Apartment Investment and Management Company (Aimco) — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts below are in millions unless noted. Aimco is a REIT whose operating partnership holds its assets and conducts its business; Aimco owned 95.4% of the partnership’s common units at quarter-end.
Business context and portfolio
Aimco owns and manages conventional and affordable apartment communities, with a strategy of selling lower-return properties and reinvesting in higher-quality communities, redevelopment and development. At June 30, 2015, it owned interests in 143 conventional communities (41,425 homes) and 56 affordable communities (8,685 homes). Conventional operations generated 90% of proportionate property NOI for the first half.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $244.8 | $246.4 | $489.0 | $495.3 |
| Operating income | $65.6 | $65.8 | $126.7 | $131.1 |
| Net income | $68.7 | $84.6 | $172.8 | $166.1 |
| Net income attributable to Aimco common stockholders | $60.8 | $75.0 | $150.1 | $139.2 |
| Diluted EPS | $0.39 | $0.51 | $0.97 | $0.95 |
| Cash from operating activities | Not presented quarterly | Not presented quarterly | $157.3 | $144.3 |
Q2 net income included $44.8 million of gains on property dispositions, versus $66.7 million a year earlier. First-half disposition gains were $130.5 million, versus $136.2 million. Common dividends declared were $0.30 per share for Q2 and $0.58 for the first half, up from $0.26 and $0.52, respectively.
Conventional same-store NOI rose 6.7% in Q2 and 6.0% in the first half; same-store revenue increased 4.5% in both periods. Affordable NOI increased 7.4% in Q2 and 7.1% in the first half. For the conventional portfolio, Q2 average revenue per effective home was $1,759; management reported a 67% operating margin and a 60% free-cash-flow margin, using its stated portfolio measures.
Aimco’s non-GAAP diluted FFO per share increased 8% in Q2 and 6% for the first half; AFFO per share increased 5% and 7%, respectively. These are company-defined non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Balance sheet, debt and liquidity
- Total assets were $6.16 billion at June 30, 2015, versus $6.10 billion at December 31, 2014.
- Total indebtedness was $3.87 billion, down from $4.14 billion; this comprised $3.82 billion of non-recourse property debt and $47.5 million drawn on the revolving credit facility.
- Cash and cash equivalents were $46.8 million and restricted cash was $89.1 million. The $600 million credit facility had $514.9 million of remaining borrowing capacity after outstanding borrowings and letters of credit.
- First-half cash flows: $157.3 million provided by operations, $83.8 million used in investing and $55.6 million used in financing. Capital expenditures were $173.1 million.
- Management reported that 93% of leverage was property-level, non-recourse, long-dated debt and 6% perpetual preferred equity; 98% of property debt was fixed-rate. Weighted-average property debt maturity was 8.4 years.
- Trailing-twelve-month leverage ratios at June 30 were 6.5x proportionate debt/Adjusted EBITDA, 7.0x proportionate debt plus preferred equity/Adjusted EBITDA, and 2.6x Adjusted EBITDA/adjusted interest and preferred dividends.
Changes, outlook and management commentary
Q2 net income attributable to Aimco fell $13.2 million year over year, principally because disposition gains were lower. First-half attributable net income rose $15.2 million, primarily reflecting higher property NOI and lower interest expense. Interest expense fell 9.9% in Q2 and 6.9% for the first half, mainly due to lower average property debt balances and dispositions.
Management reported conventional new and renewal lease rates 5.4% above expiring rents combined in Q2. Same-store occupancy and rent growth, redevelopment lease-up and acquisitions supported property results. Aimco completed three redevelopment projects during the first half and invested $68.2 million in redevelopment and $40.1 million in development.
Management expected 2015 development and redevelopment spending of $225 million to $240 million. It reported $173.9 million of commitments for capital activities, most expected within 12 months; $66.4 million remained available on the One Canal Street development loan. The company expected to comply with credit-agreement coverage covenants over the next 12 months. Two rating agencies upgraded Aimco to BBB- with a stable outlook; management said it did not anticipate issuing corporate debt.
Risks, contingencies and unusual items
- Management cited exposure to apartment-market conditions, financing availability and cost, debt covenant compliance, local economic and employment trends, interest rates, competition, severe weather, litigation and environmental liabilities. It reported no material changes to the prior annual report’s risk factors.
- Aimco was in discussions with the EPA concerning groundwater contamination near a former Indiana property. Aimco disputed responsibility for contamination in the residential area and stated it did not expect a material adverse effect; the outcome remained uncertain.
- The IRS notified the operating partnership of its intent to audit tax years 2011 and 2012. Management did not expect a material effect.
- The company reported no communities classified as held for sale at quarter-end. It sold eight consolidated communities in the first half, recognizing $130.5 million in gains; disposition prepayment penalties totaled $19.8 million.
- The company had $61.9 million fair value of available-for-sale securitization investments and stated it expected to recover its investment basis at maturity despite a temporary fair-value decline in the most subordinate position.
- Management had not determined the effect of the new consolidation standard ASU 2015-02. It did not expect the debt-issuance-cost presentation standard ASU 2015-03 to have a significant financial-statement effect.
Most important facts for investors to verify
- Whether same-store rent growth and NOI gains continue, and whether expense growth or market conditions weaken margins.
- Disposition proceeds and gains versus recurring operating performance; Q2 GAAP earnings were materially affected by property-sale gains.
- Execution, cost and lease-up of the redevelopment and development pipeline, including the $225–$240 million 2015 spending outlook and outstanding commitments.
- Debt maturities, fixed-rate exposure, credit-facility availability, leverage ratios and continued covenant compliance.
- Progress and potential exposure from the Indiana environmental matter, tax-credit compliance obligations and the IRS audit.
- Non-GAAP FFO, AFFO and leverage calculations, including the company’s definitions and reconciliations to GAAP measures.