Business context and reporting period
Apartment Investment and Management Company (Aimco) and AIMCO Properties, L.P. filed this combined, unaudited Form 10-Q for the quarter ended March 31, 2015. Aimco is a REIT and owned 95.3% of the Operating Partnership’s common units. The business owns and manages conventional and affordable apartment communities, primarily in major coastal and job-growth markets. At quarter-end, Aimco held interests in 141 conventional communities with 42,566 homes and 57 affordable communities with 8,769 homes.
Financial and operating performance
- Revenue: $244.3 million, down 1.9% from $248.9 million in Q1 2014. Rental and other property revenue was $238.3 million; tax-credit and asset-management revenue declined to $6.0 million from $8.8 million.
- Profit: Operating income was $61.1 million versus $65.3 million. Net income was $104.2 million versus $81.5 million, including real estate disposition gains of $85.7 million versus $69.5 million. Aimco common-stockholder income was $89.3 million; diluted EPS was $0.58 versus $0.44. The increase in net income was principally driven by disposition gains, not operating-income growth.
- Property performance: Conventional same-store revenue rose 4.4%, expenses rose 2.9%, and NOI increased 5.2%. Affordable-segment NOI increased 6.8%. Conventional retained-portfolio average revenue per effective home rose 13.2% to $1,704, reflecting same-store growth as well as acquisitions, redevelopment and portfolio sales. Management reported conventional portfolio operating and free-cash-flow margins of 65% and 61%, respectively.
- Cash flow: Operating cash flow was $64.7 million, up from $54.8 million. Investing activities provided $20.4 million, compared with $46.1 million used in Q1 2014; disposition proceeds of $133.3 million were partly offset by $71.7 million of capital expenditures and $40.8 million of real estate purchases. Financing activities provided $50.4 million. Cash and equivalents ended the quarter at $164.5 million, up from $29.0 million at year-end; restricted cash was $95.4 million.
- Debt and liquidity: Total indebtedness was $3.89 billion, down from $4.14 billion at December 31, 2014; there were no revolver borrowings at quarter-end and $562.1 million of capacity was available, net of letters of credit. Management’s trailing-twelve-month debt-and-preferred-equity/Adjusted EBITDA ratio was 6.9x, and Adjusted EBITDA coverage of interest and preferred dividends was 2.6x. Approximately 98% of property debt was fixed-rate; its weighted-average maturity was 8.1 years.
Material changes versus the prior comparable period
- Aimco issued 9.43 million common shares, raising net proceeds of $366.6 million, which were contributed to the Operating Partnership. Proceeds helped repay the revolving credit facility, repay property debt to expand the unencumbered asset pool, and redeem $27.0 million of Series A preferred stock.
- Q1 included sales of six consolidated communities with 1,100 homes, producing $85.7 million in disposition gains; Q1 2014 included five communities with 1,606 homes and $69.5 million in gains. Prepayment penalties on consolidated dispositions were $12.1 million versus $5.8 million.
- Interest expense fell 4.0% to $53.5 million, mainly because of lower average property debt, partly offset by project-related interest and higher prepayment penalties. Depreciation and amortization increased 5.9% to $74.4 million.
- Operating cash flow improved by $9.9 million. Capital expenditures declined to $71.7 million from $94.2 million, while real estate purchases increased to $40.8 million from $12.9 million.
Outlook, commentary, risks and contingencies
No specific earnings or revenue guidance was provided. Management’s stated strategy is to sell lower-return properties and reinvest in higher-quality communities, redevelopment and development. It targets debt and preferred equity below 7.0x Adjusted EBITDA and coverage of interest and preferred dividends above 2.5x; reported Q1 trailing-twelve-month results met those targets. Management expected continued leverage reduction from earnings growth and scheduled debt amortization, and expected to remain in compliance with credit-agreement covenants over the next 12 months.
Management reported redevelopment completions at Lincoln Place and The Preserve at Marin on schedule and below its latest cost estimates, with rents above underwriting. One Canal Street remained under development; total redevelopment and development commitments were approximately $221.7 million, with more than half expected over the following 12 months. A $114.0 million non-recourse project loan had $75.6 million available to draw.
Risks include apartment-market and economic conditions, financing availability and cost, debt-covenant compliance, project execution, weather and insurance, litigation, environmental exposure, and maintaining REIT qualification. The filing reported no material change in risk factors or market-risk disclosures from the 2014 Form 10-K. Aimco was discussing EPA allegations concerning groundwater contamination near a former Indiana property; it disputed responsibility for the separate residential-area contamination and did not expect a material adverse effect. The company also did not expect material tax-credit investor refunds or a material effect from the IRS audit of 2011–2012 tax years. These outcomes remain subject to uncertainty.
Important facts for investors to verify
- How much of reported earnings growth reflects property operations versus disposition gains and tax benefits.
- Whether conventional same-store rent and NOI growth, occupancy and cost trends continue, and how much portfolio-average revenue growth is attributable to acquisitions, redevelopment and asset sales.
- Use of the remaining equity-offering proceeds, future debt repayments, liquidity needs and progress against leverage and coverage targets.
- Redevelopment and development costs, schedules, lease-up and achieved rents, particularly for One Canal Street and other projects with substantial remaining commitments.
- Resolution and potential exposure from the Indiana environmental matter, tax-credit compliance obligations and the IRS audit.