Business context and reporting period
Apartment Investment and Management Company (Aimco), a REIT, and its operating partnership filed this combined unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The business owns, manages and redevelops apartment communities, primarily in U.S. coastal and job-growth markets. At quarter-end, Aimco held interests in 176 conventional properties with 55,965 units and 82 affordable properties with 11,212 units.
Financial performance and liquidity
Amounts below are in millions except per-share data; figures are for Aimco and its consolidated entities unless noted.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $259.7 | $253.3 | $514.8 | $505.3 |
| Operating income | $64.5 | $48.1 | $122.2 | $88.1 |
| Income (loss) from continuing operations | $4.2 | $(7.5) | $4.8 | $(30.1) |
| Net income attributable to Aimco common stockholders | $10.1 | $0.5 | $15.2 | $(10.1) |
| Diluted EPS | $0.07 | $0.00 | $0.10 | $(0.08) |
| Operating cash flow | — | $173.0 | $152.0 | |
| Capital expenditures | — | $163.4 | $117.4 |
Revenue rose 2.5% in Q2 and 1.9% for the half-year. Operating income improved as property operations strengthened and depreciation declined. However, net income was materially affected by discontinued operations: these contributed $2.8 million in Q2 and $5.0 million for the half-year, versus $41.6 million and $74.9 million in the comparable 2012 periods, largely reflecting lower property-sale gains. Common-stockholder earnings also benefited from lower preferred dividends following the 2012 redemption of $600.9 million of preferred securities.
Conventional same-store NOI increased 5.3% in Q2 and 4.9% for the first half; total conventional segment NOI rose 6.2% and 6.0%, respectively. Affordable segment NOI was nearly flat in Q2 and declined 0.5% for the half-year. Management reported a 64% operating margin for the conventional portfolio in Q2. FFO attributable to Aimco common stockholders was $71.1 million in Q2 and $141.2 million for the half-year; AFFO was $53.4 million and $108.4 million. FFO and AFFO are non-GAAP measures and should not be treated as substitutes for GAAP earnings or operating cash flow.
Cash and cash equivalents were $46.9 million at June 30, down from $84.4 million at year-end; restricted cash was $123.1 million. Total indebtedness was $4.84 billion, including $187.1 million drawn on the revolving facility, compared with $4.68 billion at year-end. The company had $268.4 million of remaining credit-facility borrowing capacity, net of borrowings and letters of credit. Operating cash flow increased $21.0 million year over year, while investing activities used $266.8 million, including capital spending and a $119.1 million purchase of West Harlem property loans. Financing activities provided $56.3 million; cash declined $37.5 million over the half-year.
Material changes versus the prior comparable period
- Q2 common-stockholder net income rose to $10.1 million from $0.5 million; first-half results improved from a $10.1 million loss to $15.2 million of income. Lower preferred-stock dividends and unit distributions after 2012 redemptions were a major factor.
- Continuing-operations income improved, but total income attributable to Aimco declined year over year: $10.9 million versus $22.8 million for Q2, and $16.8 million versus $24.7 million for the half-year. Lower disposition gains in discontinued operations drove the declines.
- Same-store conventional NOI grew, supported by rent and revenue growth; property expenses also rose. For the first half, conventional same-store occupancy declined 20 basis points year over year, while Q2 average daily occupancy increased 10 basis points.
- Capital expenditures increased $45.9 million year over year to $163.4 million for the half-year. Revolver borrowings rose from zero at year-end to $187.1 million.
Outlook, risks and unusual items
- Management expected full-year 2013 property expense growth of 3.0%–3.5%, with second-half growth moderating to 1%–2%. Conventional redevelopment spending was expected to be approximately $130 million–$160 million in 2013. The filing does not provide formal earnings or revenue guidance.
- Aimco plans to dispose of affordable properties and reinvest proceeds in its conventional portfolio over the next four to five years. It expects to reach its stated leverage targets in early 2014, supported by earnings growth and scheduled debt amortization.
- Leverage remained above company targets: trailing-twelve-month debt to proportionate EBITDA was 7.8x versus a target below 7.0x; debt and preferred equity to EBITDA was 8.0x versus below 7.0x. Interest coverage was 2.5x, while coverage of interest and preferred dividends was 2.4x versus a target above 2.5x. Credit-agreement coverage ratios remained above covenants at 1.72x debt service and 1.67x fixed charge, against minimums of 1.50x and 1.30x.
- About 97% of property-level debt was fixed-rate; its weighted average maturity was 7.9 years. The revolver matures in December 2014, with two possible one-year extensions subject to conditions. Management cited financing availability and cost, debt-covenant compliance, local apartment demand and supply, operating-cost inflation, interest rates, redevelopment execution, weather, litigation and environmental liabilities as risks.
- During Q2, Aimco acquired a 60-unit La Jolla property for $29.0 million and purchased $119.1 million of first-mortgage loans secured by 84 West Harlem buildings. The borrower agreed to repay the loans by November 22, 2013 and pay for Aimco’s unexercised purchase option. The 2012 Napico asset-management portfolio sale remains seller-financed and is accounted for under the profit-sharing method; a gain is conditional on full payment and meeting sale-accounting requirements.
- Aimco reported no material change in risk factors from its 2012 Form 10-K. It disclosed ongoing environmental and ordinary-course legal exposures, but did not expect these matters to materially affect its financial condition, results or cash flows. A tax-court challenge concerning 2006–2007 partnership tax adjustments was not expected to have a material effect.
Important facts for investors to verify
- Whether conventional rent and NOI growth persist and offset rising property expenses, and whether affordable-property NOI stabilizes.
- Progress toward leverage and coverage targets, revolver refinancing or extension, covenant headroom, and the planned expansion of the unencumbered asset pool.
- Execution, remaining cost and timing of redevelopment projects, including the $176.4 million of construction commitments and expected 2013 redevelopment spending.
- Collection and repayment terms for the West Harlem loans and seller-financed Napico notes, including any effect on liquidity or eventual gain recognition.
- How much reported earnings and cash generation depend on property dispositions, discontinued operations, noncontrolling interests, and non-GAAP FFO/AFFO adjustments.