AIV

Business Context and Reporting Period

Company: Apartment Investment & Management Company (Aimco)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Business Overview: Aimco is a self-administered and self-managed Real Estate Investment Trust (REIT) engaged in the acquisition, ownership, management, and redevelopment of apartment properties. As of December 31, 2005, the company owned or managed 1,370 properties containing 240,484 units across 47 states, the District of Columbia, and Puerto Rico. The portfolio is divided into conventional (market-rate) and affordable (subsidized) segments.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: Net income decreased by $192.5 million (73%) compared to 2004. This was primarily driven by a significant decrease in income from discontinued operations due to lower net gains on real estate dispositions, a decrease in net gain on dispositions of unconsolidated entities, and increases in depreciation, interest, and general and administrative expenses.
• Operating Performance: Despite the net income decline, Net Operating Income (NOI) for consolidated property operations increased by $77.8 million (11.5%). Same-store conventional property NOI increased by 6.3%, driven by a 2.9% increase in occupancy and a 2.1% increase in average rent per unit.
• Portfolio Activity: The company sold 83 consolidated properties in 2005, generating net cash proceeds of $331.8 million. Acquisitions included six conventional core properties for approximately $284 million. The company also consolidated 21 previously unconsolidated properties due to increased ownership or accounting rule changes (FIN 46).
• Capital Expenditures: Total capital expenditures were $443.9 million, including $89.7 million for capital replacements, $112.0 million for capital improvements, and $140.3 million for redevelopment.

Guidance, Outlook, and Risks

• 2006 Outlook: Management plans to invest between $150 million and $200 million in conventional redevelopment projects and approximately $80 million in affordable property redevelopment. Gross sales proceeds from 2006 dispositions are expected to range from $750 million to $950 million.
• Cost of Capital: The company intends to reduce its cost of capital by redeeming $286.8 million of preferred securities with a weighted average cost of 9.76% in 2006.
• Key Risks:
  • Interest Rate Risk: Approximately $2.0 billion of debt is variable-rate. A 1% increase in 30-day LIBOR would reduce income before minority interests by approximately $8.9 million annually.
  • REIT Qualification: Failure to qualify as a REIT would subject the company to corporate income tax and trigger defaults on credit facilities.
  • Environmental and Legal: Risks include potential liabilities for hazardous substances, mold exposure claims (limited insurance coverage), and ongoing litigation regarding insurance agents (National Union/NPS) and labor standards (FLSA).

Investor Verification Checklist

• Discontinued Operations Impact: Verify the sustainability of earnings by analyzing the volatility of gains from property dispositions, which significantly impacted the 2004 vs. 2005 comparison.
• Debt Maturity Profile: Review the schedule of debt maturities, noting $541.4 million due in 2006 and the reliance on refinancing variable-rate debt.
• FFO vs. Net Income: Confirm the divergence between GAAP Net Income (loss to common) and FFO (positive), a standard characteristic of REITs due to depreciation, to assess true operating cash flow.
• Preferred Stock Redemptions: Monitor the execution of the planned 2006 redemption of high-cost preferred securities to assess future interest expense reduction.
• Accounting Changes: Review the impact of the adoption of EITF 04-5 and changes in depreciation estimates for capitalized payroll costs, which increased depreciation expense by approximately $4.6 million in 2005.