Business context and reporting period
Apartment Investment and Management Company (Aimco) is a self-managed REIT focused on owning and operating primarily B/B+ apartment properties, improving its portfolio through dispositions and reinvestment, and using mainly non-recourse property debt. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2011; amounts below are in millions except per-share data.
At quarter-end, Aimco had equity interests in 215 conventional properties with 67,049 units and 205 affordable properties with 24,406 units. Conventional and affordable operations contributed 87% and 13% of proportionate property NOI, respectively.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $281.0 | $276.5 | $562.1 | $547.8 |
| Operating income | $49.8 | $34.7 | $90.2 | $58.3 |
| Loss from continuing operations | $(43.4) | $(38.3) | $(73.9) | $(74.0) |
| Net loss attributable to Aimco common stockholders | $(33.2) | $(18.0) | $(65.0) | $(58.4) |
| FFO attributable to Aimco common stockholders, diluted | $32.3 | $46.9 | $76.7 | $76.3 |
| Pro forma FFO attributable to Aimco common stockholders, diluted | $32.3 | $47.8 | $78.0 | $84.7 |
Q2 diluted loss per common share was $0.28, compared with $0.15 a year earlier; six-month loss per share was $0.55 versus $0.50. Common dividends declared were $0.12 per share in Q2 and $0.24 for the half-year, compared with $0.10 for each comparable 2010 period.
Same-store property performance improved: total same-store revenue rose 2.6% and expenses fell 1.4% in Q2, increasing NOI 5.1%; the same-store operating margin reached 63%, up about 200 basis points. For the half-year, same-store NOI rose 6.8% and margin was 63%, up about 300 basis points. Conventional same-store occupancy averaged 95.9% in Q2. Average conventional monthly rent was $1,079; new lease rates were 5.1% above expiring rents and renewals 3.6% above.
Interest expense increased to $96.7 million in Q2 from $76.2 million and to $171.8 million for the half-year from $152.6 million, primarily because of $20.7 million of refinancing prepayment penalties and a $2.3 million deferred financing cost write-off. The refinancing extended maturities and was intended to lower borrowing costs over time.
Six-month operating cash flow was $95.2 million, down from $111.0 million. Investing activities used $33.5 million; financing activities used $87.7 million. Capital expenditures were $61.8 million. Cash and cash equivalents were $85.3 million at June 30, down $26.0 million from year-end; restricted cash was $196.4 million.
Total indebtedness was $5.37 billion at June 30, versus $5.39 billion at December 31, 2010. Aimco reported $4.87 billion in non-recourse property loans and $434.5 million in tax-exempt bond financing, plus $21.5 million outstanding under its revolving facility. Approximately 93% of property debt was fixed-rate; weighted-average property-debt maturity was 8.1 years. Available revolving capacity was $251.5 million. Credit-agreement covenant ratios were 1.59:1 for EBITDA to debt service and 1.35:1 for earnings to fixed charges, above minimums then in effect; management expected continued compliance over the next 12 months.
Material changes and significant transactions
- Revenue increased 1.6% in Q2 and 2.6% for the half-year year over year. Lower property operating costs, higher occupancy and rents, and improved conventional and affordable same-store NOI supported operating income growth.
- Common-stockholder losses worsened, despite stronger continuing-property operations, mainly because discontinued-operations income declined as property-sale gains fell and refinancing charges raised interest expense. Discontinued-operations income was $16.5 million in Q2 versus $28.1 million and $19.6 million for the half-year versus $47.0 million.
- Aimco refinanced $657.0 million of property loans during the half-year. A related securitization replaced $625.7 million of loans due 2012–2016 with $673.8 million of new ten-year loans, amortizing over 30 years and carrying a weighted-average stated rate of 5.49%. Aimco invested $51.5 million in first-loss and mezzanine securities with $100.9 million face value; management described the transaction as reducing effective leverage.
- Aimco sold or disposed of 27 consolidated properties during the half-year, generating $138.6 million gross sale proceeds and $27.2 million of net gains. Two properties, totaling 710 units, remained classified as held for sale at June 30, compared with 29 properties and 4,750 units at year-end.
- Aimco sold 2.8 million shares through its at-the-market program, generating $69.2 million net proceeds; some proceeds from shares settling after quarter-end were to be recognized later. In July, it issued 800,000 shares of 7.00% preferred stock for $18.5 million net proceeds, intended to partially redeem higher-dividend preferred securities.
Outlook, risks and contingencies
The filing provides no specific full-year earnings or FFO guidance. Management emphasized portfolio improvement, continued refinancing of 2012–2015 maturities, and redevelopment of selected existing properties rather than ground-up development. Aimco expected to fund future capital needs through operating cash flow, property sales, and debt and equity financing. It cautioned that operating results are not necessarily indicative of full-year results.
Management identified financing availability and cost, debt-covenant compliance, apartment-market conditions, rent and occupancy trends, operating-cost inflation, regulation, competition, property dispositions, insurance, severe weather, litigation, environmental liabilities, and continued REIT qualification as risks. A 1 percentage-point increase in 30-day LIBOR was estimated to reduce annual net income attributable to common stockholders by about $3.1 million, or $0.03 per share, before offsets from variable-rate assets. Total-return swaps provided near-term interest savings but could become a liquidity cost if rates rise; related swap positions totaled approximately $164.6 million.
Other items to monitor include a possible West Harlem property put, contingent on operating thresholds, which could require about $30.7 million cash and assumption of $118.5 million property debt; a $3.4 million additional loan commitment; and $14.0 million of construction commitments. A limited partner dispute was mediated with Aimco agreeing to pay $7.5 million additional consideration. The company reported no expected material effect from pending IRS examinations of 2006 and 2007 partnership tax returns, and did not anticipate material tax-credit investor refunds. It recorded $6.3 million of held-for-sale/discontinued-property impairment losses for the half-year. Management noted $3.5 million of 2011 losses from severe Northeast snowstorms.
Important facts for investors to verify
- Whether same-store rent, occupancy, and expense improvements persist, and how they translate into cash flow and FFO after refinancing costs.
- The realized net borrowing cost and cash-flow consequences of the securitization investment and remaining total-return swaps.
- Upcoming debt maturities, covenant headroom as minimum ratios rise in 2012, and actual availability of revolving credit.
- Cash proceeds, debt assumed or repaid, and gains or impairments from continuing property dispositions.
- Potential exposure from the West Harlem put, legal matters, tax-credit compliance, environmental obligations, and casualty claims.
- The terms and timing of the planned redemption of higher-dividend preferred securities following the July preferred-stock offering.