APARTMENT INVESTMENT & MANAGEMENT CO. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparative figures are for the corresponding 2016 periods. The filing combines Aimco and AIMCO Properties, L.P. Aimco is a REIT focused on owning, operating, redeveloping and selectively developing apartment communities. At quarter-end, its portfolio included interests in 141 communities with 39,184 homes; Aimco owned 95.5% of the Operating Partnership’s common units.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $254.6 million | $248.9 million | $750.2 million | $746.4 million |
| Operating income | $59.2 million | $58.7 million | $176.7 million | $186.7 million |
| Net income attributable to Aimco common stockholders | $17.4 million; $0.11/share | $11.2 million; $0.07/share | $44.8 million; $0.29/share | $255.8 million; $1.64/share |
| FFO per diluted share | $0.63 | $0.54 | $1.82 | $1.71 |
| Pro forma FFO per diluted share | $0.63 | $0.55 | $1.82 | $1.72 |
| AFFO per diluted share | $0.54 | $0.45 | $1.56 | $1.46 |
| Dividends declared per common share | $0.36 | $0.33 | $1.08 | $0.99 |
For the nine months, cash provided by operations was $285.0 million, capital expenditures were $266.6 million, and cash used in investing activities was $274.1 million. Cash and cash equivalents were $38.8 million at September 30; including restricted cash, consolidated cash was $86.3 million. Total assets were $6.17 billion and total liabilities were $4.63 billion.
Balance-sheet indebtedness associated with the Real Estate portfolio was $4.16 billion, including $3.56 billion of non-recourse property debt, a $249.3 million term loan and $356.2 million drawn on the revolver. Separately, Asset Management partnerships had $228.4 million of non-recourse property debt. Management’s non-GAAP Proportionate Debt was $4.00 billion; available revolver capacity was $231.8 million after outstanding borrowings and letters of credit.
Material changes versus prior periods
- Q3 net income attributable to Aimco common stockholders rose $6.3 million year over year; nine-month net income fell sharply, primarily because 2016 included substantially larger real-estate disposition gains. Nine-month 2017 net disposition gain was $0.9 million versus $237.2 million in 2016.
- Same Store proportionate NOI increased 4.5% in Q3 and 4.6% year to date. Q3 Same Store revenue grew 2.8% and expenses declined 1.1%; average daily occupancy increased 20 basis points. Renewal and new-lease rates produced a 3.0% weighted-average increase in Q3.
- Pro forma FFO per share increased 14.5% in Q3, to $0.63. Management attributed the increase principally to Same Store NOI growth and lease-up of redevelopment and development properties; AFFO per share rose 20.0% to $0.54, including lower capital-replacement spending.
- Debt increased following the June reacquisition of the remaining 47% Palazzo joint-venture interest for $451.5 million, including assumption of $140.5 million of debt and $311.0 million cash consideration. A new $250 million term loan helped fund the transaction; the short-term borrowings were expected to be repaid with apartment-sale proceeds.
- Cash flow from operations increased $8.6 million year over year, while capital expenditures rose to $266.6 million from $259.3 million. Financing cash flow included $324.3 million of purchases and redemptions of noncontrolling interests, largely related to the Palazzo transaction.
Outlook, management commentary and risks
- Management targeted net leverage of $3.8 billion and said leverage was temporarily above target after the Palazzo transaction. It planned sales of communities in Virginia, Maryland and New Jersey. Management expected year-end Proportionate Debt/Adjusted EBITDA and Proportionate Debt plus Preferred Equity/Adjusted EBITDA of approximately 6.2x and 6.6x, respectively, versus 6.9x and 7.3x at quarter-end. These are management estimates, not guarantees.
- Management expected to spend $150–$170 million on redevelopment and development in 2017. The project pipeline had estimated net investment of $710.4 million, of which $481.4 million had been funded, with a projected weighted-average NOI yield of 6.1% assuming untrended rents. Management expected $95–$105 million of 2017 property-upgrade investment.
- Management said redevelopment communities were leasing broadly in line with expectations. The third Park Towne Place tower was 74% leased at quarter-end; the company planned a $40 million redevelopment of its fourth tower. Parc Mosaic, a planned 226-home development with estimated investment of $117 million, was scheduled to begin construction by year-end.
- Management expected Asset Management contribution to net income to decline as remaining tax credits are delivered and partnerships sell underlying communities. The company described exiting this business as part of its plan.
- Key risks include apartment-market competition and operating-cost increases; financing availability, interest rates and debt-covenant compliance; severe weather and insurance costs; legal and regulatory matters; and environmental remediation exposure. A 100-basis-point increase in 30-day LIBOR was estimated to reduce annual net income by approximately $6.7 million. At quarter-end, variable-rate debt included $83.1 million of property debt and $606.2 million of Credit Agreement borrowings.
- Contingencies include a La Jolla Cove buyer lawsuit set for jury trial in February 2018, and environmental matters involving former properties in Indiana and Lake Tahoe. Management did not expect these matters to have a material adverse effect, but outcomes remain uncertain. The filing reported $96.2 million of commitments for construction, redevelopment and capital improvements, most expected within 12 months.
- Unusual items: adoption of an income-tax accounting standard generated a $65.7 million cumulative adjustment to opening retained earnings; the filing says this was not a current-period operating expense. Release of the final Napico debt guarantee resulted in a $7.1 million gain, net of tax, in Q3. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether planned apartment sales occur on schedule and generate enough proceeds to bring leverage toward the $3.8 billion target and repay temporary borrowings.
- Progress, leasing, costs and timing for the redevelopment and development pipeline, including Park Towne Place and Parc Mosaic; compare actual results with the stated 6.1% projected yield.
- Same Store rent growth, occupancy and expense trends, and whether FFO/AFFO growth converts into sustainable operating cash flow.
- Debt maturities, variable-rate exposure, covenant headroom and the terms or repayment of the $250 million term loan, which matures June 30, 2018 with a one-year extension option.
- Developments in the La Jolla Cove litigation and environmental proceedings, and any resulting changes to estimated liabilities or management’s materiality assessment.
- FFO, Pro forma FFO, AFFO and leverage ratios are non-GAAP measures defined by Aimco; review their reconciliations and definitions before comparing them with other REITs.