Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
AIV > SEC Filings for AIV > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for APARTMENT INVESTMENT & MANAGEMENT CO

Form 10-Q for APARTMENT INVESTMENT & MANAGEMENT CO


1-Nov-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements in certain circumstances. Certain information included in this report contains or may contain information that is forward-looking, within the meaning of the federal securities laws, including, without limitation, statements regarding: our ability to maintain current or meet projected occupancy, rental rates and property operating results; the effect of acquisitions, dispositions and redevelopments; our ability to meet budgeted costs and timelines, and achieve budgeted rental rates related to our development and redevelopment projects; and our ability to comply with debt covenants, including financial coverage ratios. Actual results may differ materially from those described in these forward-looking statements and, in addition, will be affected by a variety of risks and factors, some of which are beyond our control, including, without limitation: financing risks, including the availability and cost of financing and the risk that our cash flows from operations may be insufficient to meet required payments of principal and interest; the risk that our earnings may not be sufficient to maintain compliance with debt covenants; real estate risks, including fluctuations in real estate values and the general economic climate in the markets in which we operate and competition for residents in such markets; national and local economic conditions, including the pace of job growth and the level of unemployment; the terms of governmental regulations that affect us and interpretations of those regulations; the competitive environment in which we operate; the timing of acquisitions, dispositions and redevelopments; insurance risk, including the cost of insurance; natural disasters and severe weather such as hurricanes; litigation, including costs associated with prosecuting or defending claims and any adverse outcomes; energy costs; and possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us. In addition, our current and continuing qualification as a real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code and depends on our ability to meet the various requirements imposed by the Internal Revenue Code, through actual operating results, distribution levels and diversity of stock ownership. Readers should carefully review our financial statements and the notes thereto, as well as the section entitled "Risk Factors" described in Item 1A of Apartment Investment and Management Company's and AIMCO Properties, L.P.'s combined Annual Report on Form 10-K for the year ended December 31, 2012, and the other documents we file from time to time with the Securities and Exchange Commission. As used herein and except as the context otherwise requires, "we," "our" and "us" refer to Apartment Investment and Management Company (which we refer to as Aimco), AIMCO Properties, L.P. (which we refer to as the Aimco Operating Partnership) and their consolidated entities, collectively.
Executive Overview
Aimco and the Aimco Operating Partnership are focused on the ownership, management and redevelopment of quality apartment communities located in the largest coastal and job growth markets in the United States. Our business activities are defined by a commitment to our core values of integrity, respect, collaboration, a focus on our customers and a performance culture. These values and our corporate mission, to consistently provide quality apartment homes in a respectful environment delivered by a team of people who care, continually shape our culture. In all our dealings with residents, team members, business partners and equity holders, we aim to be the best owner and operator of apartment communities and an outstanding corporate citizen.
Our principal financial objective is to provide predictable and attractive returns to our equity holders. Our business plan to achieve this objective is to:
operate our portfolio of desirable apartment homes with valued amenities, with a high level of customer service and in an efficient manner that realizes the benefits of our local management expertise;

improve our geographically diversified portfolio of market-rate apartment properties, which average "B/B+" in quality (defined below) by selling properties inconsistent with our portfolio strategy and investing the proceeds from such sales through redevelopment and acquisition of higher-quality properties; and

provide financial leverage primarily by the use of non-recourse, long-dated, fixed-rate property debt and perpetual preferred equity, a combination which helps to limit our refunding and re-pricing risk and provides a hedge against increases in interest rates, capitalization rates and inflation.

Our property operations consist primarily of our diversified portfolio of market-rate apartment communities, which we refer to as conventional properties. At September 30, 2013, our conventional property operations included 173 properties with 54,094 apartment homes in which we held an average ownership of 97%. We also operate a portfolio of affordable properties, which consists of apartments with rents that are generally paid, in whole or part, by a government agency. At September 30, 2013, our affordable property operations consisted of 79 properties with 10,891 apartment homes in which we held an average ownership of 81%. Our conventional and affordable property operations comprise our reportable segments and generated 90% and 10%, respectively, of our proportionate property net operating income (defined below under "Results of Operations - Real Estate


Table of Contents

Operations") during the nine months ended September 30, 2013. Over the next four to five years, we expect to dispose of our affordable properties and reinvest the proceeds in our conventional portfolio.
For the three months ended September 30, 2013, our conventional portfolio had average revenue per apartment home of $1,426 and provided 64% operating margins. Average revenue per apartment home represents rental and other property revenues divided by the number of actual apartment homes multiplied by our ownership interest in the property as of the end of the current period. The average revenue per apartment home for our conventional portfolio increased 6.6% from average revenues of $1,338 for the three months ended September 30, 2012, as a result of year-over-year per home revenue growth of 4.4% and the sale of conventional properties during 2012 with average revenues per home substantially lower than the properties in the retained portfolio. During the three months ended September 30, 2013, on average, combined conventional new and renewal lease rates were 3.3% higher than expiring lease rates.
Our portfolio strategy seeks predictable rent growth from a portfolio of "A," "B" and "C" quality market-rate apartment properties, which average "B/B+" in quality and are diversified among the largest coastal and job growth markets in the United States, as measured by total apartment value. We measure conventional property quality based on average rents of our apartment homes compared to local market average rents as reported by a third-party provider of commercial real estate performance and analysis. Under this rating system, we classify as "A" quality properties those earning rents greater than 125% of the local market average, as "B" quality properties those earning rents 90% to 125% of the local market average and as "C" quality properties those earning rents less than 90% of the local market average. We classify as "B/B+" those properties earning rents ranging from 100% to 125% of the local market average. Although some companies and analysts within the multifamily real estate industry use property class ratings of "A," "B" and "C," some of which are tied to local market rent averages, the metrics used to classify property quality as well as the timing for which local markets rents are calculated may vary from company to company. Accordingly, our rating system for measuring property quality is neither broadly nor consistently used in the multifamily real estate industry.
We upgrade the quality of our portfolio through the sale of properties with lower projected returns, lower operating margins, and lower expected future rent growth. These properties are often located in markets we deem less desirable than our target markets. We reinvest the sale proceeds in properties already in our portfolio, through redevelopment or property upgrades and increased ownership, or through the purchase of other properties and in limited situations, the development of properties.
We believe redevelopment of certain properties in superior locations provides advantages over ground-up development, enabling us to generate rents comparable to new properties with lower financial risk, in less time and with reduced delays associated with governmental permits and authorizations. Generally, we believe redevelopment provides superior risk adjusted returns with lower volatility compared to ground-up development. Redevelopment work may also include seeking entitlements from local governments, which enhance the value of our existing portfolio by increasing density, that is, the right to add apartment homes to a site. We have historically undertaken a range of redevelopment projects: from those in which there is significant renovation, such as exteriors, common areas or apartment home improvements, typically done upon lease expirations without the need to vacate apartment homes on any wholesale or substantial basis, to those in which a substantial number of all available apartment homes are vacated for significant renovations to the property. We have a specialized Redevelopment and Construction Services group to oversee these projects.
Increasing our ownership in properties in our portfolio is attractive as we already operate these properties and know them well, and these investments are especially accretive where we can eliminate overhead costs associated with the partnerships that own these properties.
In addition to improving our portfolio through the capital expenditures, including redevelopment and property upgrades, discussed below under the Liquidity and Capital Resources heading, during the nine months ended September 30, 2013, we upgraded our portfolio through the acquisition for $29.0 million, $9.5 million and $15.1 million conventional properties located in La Jolla, California, Atlanta, Georgia, and Boston, Massachusetts, respectively. The properties we acquired in La Jolla, Atlanta, and Boston had average revenues per home of $2,400, $2,100, and $2,200, respectively, at the the dates of their acquisition, which represented revenues per home of approximately 64%, 165%, and 19%, respectively, above the local market averages.
During the nine months ended September 30, 2013, we also acquired for $10.7 million the remaining noncontrolling interests in one consolidated real estate partnership that owns two conventional properties located in Atlanta, Georgia. The estimated fair value of the real estate corresponding to the interests we acquired totaled $21.0 million. At the date of the acquisition, these properties had average revenues per home of $1,140, which represented revenues per home approximately 44%, above the local market averages.
Additionally, during September 2013, we entered into an agreement with a third-party developer to construct a 12-story apartment building at One Canal Street in Boston, Massachusetts. Pursuant to this agreement, we expect to invest approximately $190.0 million over the next two years to build 310 luxury apartment homes and approximately 22,000 square feet of commercial space. Under the terms of the agreement, a third-party developer will be responsible for construction of the building. The One


Table of Contents

Canal Street development will be funded in part by a $114.0 million construction loan and in part by proceeds from sales of lower-rated properties in less desirable submarkets. The property loan bears interest at a rate of 5.2%, and matures in 2023. Consistent with our discipline of upgrading our portfolio through paired-property, leverage-neutral transactions, we have identified four properties with approximately 3,100 apartment homes that we have sold or plan to sell to fund the equity portion of the One Canal Street development. These lower-rated properties are located in Colorado, Indiana, Massachusetts and Texas and have monthly revenues per apartment home averaging approximately $750. We expect our One Canal Street investment to generate a Free Cash Flow Internal Rate of Return that is 400 to 450 basis points greater than the properties identified for sale and 200 to 225 basis points greater than is available on the acquisition of a comparable, stabilized property in this submarket. Our leverage strategy seeks to balance our desire to increase financial returns with the inherent risks of leverage and we have set leverage targets of Debt and Preferred Equity to Proportionate EBITDA of less than 7.0x and Proportionate EBITDA Coverage of Interest and Preferred Dividends of greater than 2.5x. We also focus on Debt to Proportionate EBITDA and Proportionate EBITDA Coverage of Interest ratios.
Debt, as used in these ratios, represents our proportionate share of debt, net of our proportionate share of cash and restricted cash and our investment in the subordinate tranches of a securitization that holds certain of our property loans, and Preferred Equity represents Aimco's preferred stock and the Aimco Operating Partnership's preferred OP Units. Proportionate EBITDA is calculated by adding to our Pro forma Funds From Operations our proportionate share of interest expense, taxes, depreciation and amortization related to non-real estate assets, non-cash stock-based compensation, and dividends and distributions on our preferred equity instruments. Interest, as used in these ratios, represents our proportionate share of interest expense, excluding debt prepayment penalties and amortization of deferred financing costs, and reduced by interest income we receive on our investment in the subordinate tranches of a securitization that holds certain of our property loans. Our leverage ratios for the trailing twelve month and annualized three month periods ended September 30, 2013 and 2012, are presented below:

                                         Trailing Twelve Months      Annualized Three Months
                                           Ended September 30,         Ended September 30,
                                          2013            2012        2013            2012
Debt to Proportionate EBITDA              7.8x            7.9x        7.7x            7.7x
Debt and Preferred Equity to
Proportionate EBITDA                      8.0x            8.1x        8.0x            8.0x
Proportionate EBITDA Coverage of
Interest                                  2.5x            2.3x        2.5x            2.3x
Proportionate EBITDA Coverage of
Interest and Preferred Dividends          2.4x            1.9x        2.4x            2.2x

Trailing twelve month 2013 Debt to Proportionate EBITDA and Debt and Preferred Equity to Proportionate EBITDA ratios are provided on a pro forma basis, taking into account the interest income associated with the West Harlem property loans we acquired during the second quarter, which we funded using revolving loan borrowings. We expect future leverage reduction from earnings growth generated by our current portfolio and by regularly scheduled property debt amortization funded from retained earnings. We also expect to increase our financial flexibility in the future by expanding our pool of unencumbered properties. As of September 2013, this pool included four consolidated properties, which we expect to hold beyond 2013, with an estimated fair value of approximately $190.0 million.
In June 2013, one of the rating agencies completed its initial review of our creditworthiness and outlined the factors that may have a positive impact on our ratings. These factors are: growing the unencumbered asset pool to more than $500 million (based on a stressed 8% capitalization rate) with asset quality consistent with the overall portfolio; sustaining leverage, defined by the rating agency as the ratio of net debt to recurring operating EBITDA, below 7.5x; and sustaining a fixed charge coverage ratio, also as defined by the rating agency, above 2.0x. Our stated leverage targets are in line with, or more conservative than, those indicated by the rating agency and we expect to achieve our targets in early 2014. In addition, through our normal course of refinancing activity as loans mature, on a leverage-neutral basis, we have the opportunity to grow our unencumbered pool by $150 to $200 million per year.
We remain committed to avoiding recourse debt other than our revolving line of credit. In addition to lowering the cost of our line of credit, a ratings increase may lower the cost of any future preferred equity issuance. At September 30, 2013, approximately 91% of our leverage consisted of property-level, non-recourse, long-dated debt and 3% consisted of perpetual preferred equity, a combination which helps to limit our refunding and re-pricing risk. The weighted average maturity of our property-level debt was 8.1 years, with, on average, 5.9% of our unpaid principal balance maturing per year from 2014 through 2016. Approximately 97% of our property-level debt is fixed-rate, which provides a hedge against increases in interest rates and inflation. During the nine months ended September 30, 2013, the estimated weighted average market rate for our property debt increased by approximately 50 basis points, while capitalization rates remained relatively constant. The increase in interest rates decreased the estimated market value of our property debt by approximately $400 million and absent a corresponding increase in capitalization rates, resulted in an equivalent increase in the fair value of our equity.


Table of Contents

Although our primary sources of leverage are property-level, non-recourse, long-dated, fixed-rate, amortizing debt and perpetual preferred equity, we also have a Senior Secured Credit Agreement with a syndicate of financial institutions, which we refer to as our Credit Agreement. As amended September 30, 2013, the Credit Agreement provides for $600.0 million of revolving loan commitments (an increase of $100.0 million), which we use for working capital and other short-term purposes. Borrowings under the Credit Agreement bear interest at a rate set forth on a pricing grid, which varies based on our leverage. As amended, the interest rate spread on the Credit Agreement is, on average, 70 basis points lower than it was previously. As of September 30, 2013, we had the capacity to borrow $255.6 million pursuant to the Credit Agreement, net of $298.6 million of outstanding borrowings and $45.8 million for undrawn letters of credit backed by the Credit Agreement. The Credit Agreement matures in September 2018, inclusive of a one-year extension. Under the Credit Agreement, we have agreed to Debt Service and Fixed Charge Coverage covenants. For the twelve month period ended September 30, 2013, our Debt Service and Fixed Charge Coverage ratios were 1.73x and 1.68x, respectively, compared to covenants of 1.50x and 1.30x, respectively, and ratios of 1.63x and 1.44x, respectively, for the twelve month period ended September 30, 2012. We expect to remain in compliance with these covenants during the remainder of 2013. Under the Credit Agreement, as amended, our Fixed Charge Coverage covenant will increase in 2015 to 1.40:1. Key Financial Indicators
The key financial indicators that we use in managing our business and in evaluating our financial condition and operating performance are: Net Asset Value; Funds From Operations; Pro forma Funds From Operations; Adjusted Funds From Operations; property net operating income, which is rental and other property revenues less direct property operating expenses, including real estate taxes; proportionate property net operating income; same store property operating results; Free Cash Flow, which is net operating income less spending for Capital Replacements; Free Cash Flow internal rate of return; financial coverage ratios; and leverage as shown on our balance sheet. Funds From Operations, Pro forma Funds From Operations and Adjusted Funds From Operations are defined and further described in "Funds From Operations," and proportionate property net operating income is defined and further described below under the Results of Operations - Real Estate Operations heading. The key macro-economic factors and non-financial indicators that affect our financial condition and operating performance are: household formations; rates of job growth; single-family and multifamily housing starts; interest rates; and availability and cost of financing.
Results of Operations
Because our operating results depend primarily on income from our properties, the supply and demand for apartments influences our operating results. Additionally, the level of expenses required to operate and maintain our properties and the pace and price at which we redevelop, acquire and dispose of our apartment properties affect our operating results.
The following discussion and analysis of the results of our operations and financial condition should be read in conjunction with the accompanying condensed consolidated financial statements in Item 1. Overview
Highlights of our results of operations for the three months ended September 30, 2013, are summarized below:
Conventional Same Store revenues and expenses for the three months ended September 30, 2013, increased by 4.4% and 1.6%, respectively, resulting in a 5.9% increase in net operating income as compared to the three months ended September 30, 2012;

Average revenue per apartment home for our Conventional properties increased by 6.6%, from $1,338 for the three months ended September 30, 2012 to $1,426 for the three months ended September 30, 2013.

Net operating income for our total real estate portfolio (continuing operations) for the three months ended September 30, 2013, increased 6.2% as compared to the three months ended September 30, 2012.

Three Months Ended September 30, 2013 compared to September 30, 2012 Net income attributable to Aimco and net income attributable to the Aimco Operating Partnership increased by $28.5 million and $30.6 million, respectively, during the the three months ended September 30, 2013, as compared to the three months ended September 30, 2012. The increase in income for Aimco and the Aimco Operating Partnership was principally due to an increase in the net operating income and a decrease in depreciation and amortization of our properties in continuing operations, and an increase in income from discontinued operations, primarily due to an increase in gains on dispositions. These increases were partially offset by a decrease in gains on dispositions of interests in unconsolidated real estate related to the sale of our interests in two unconsolidated partnerships during 2012.


Table of Contents

In addition to the changes in net income attributable to Aimco and the Aimco Operating Partnership described above, the amounts of net income attributable to Aimco common stockholders and net income attributable to the Aimco Operating Partnership's common unit holders increased by approximately $13.8 million during the three months ended September 30, 2013, as compared to the three months ended September 30, 2012, due to a reduction in preferred stock dividends and preferred unit distributions and related costs resulting from the redemption of $600.9 million of preferred securities during 2012.
Nine Months Ended September 30, 2013 compared to September 30, 2012 Net income attributable to Aimco and net income attributable to the Aimco Operating Partnership increased by $20.5 million and $24.2 million, respectively, during the the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012. The increase in income for Aimco and the Aimco Operating Partnership was principally due to an increase in the net operating income, a decrease in depreciation and amortization of our properties in continuing operations and a decrease in net income attributable to noncontrolling interests in consolidated real estate partnerships, partially offset by a decrease in income from discontinued operations, primarily due to a decrease in gains on dispositions, and a decrease in gains on dispositions of interests in unconsolidated real estate related to the sale of our interests in two unconsolidated partnerships during 2012.
In addition to the changes in net income attributable to Aimco and the Aimco Operating Partnership described above, the amounts of net income attributable to Aimco common stockholders and net income attributable to the Aimco Operating Partnership's common unit holders increased by approximately $47.0 million during the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012, due to a reduction in preferred stock dividends and preferred unit distributions and related costs resulting from the redemption of preferred securities discussed above.
The following paragraphs discuss these and other items affecting the results of operations of Aimco and the Aimco Operating Partnership in more detail. Real Estate Operations
As described under the preceding Executive Overview heading, our owned real estate portfolio consists primarily of conventional properties, and we also operate a portfolio of affordable properties. Our conventional and affordable property operations comprise our reportable segments.
In accordance with accounting principles generally accepted in the United States of America, or GAAP, we consolidate certain properties in which we hold an insignificant economic interest and in some cases we do not consolidate other properties in which we have a significant economic interest. Due to the diversity of our economic ownership interests in our properties, our chief operating decision maker emphasizes as a key measurement of segment profit or loss proportionate property net operating income, which represents our share of the property net operating income of the consolidated and unconsolidated properties that we own and manage. Accordingly, the results of operations of our conventional and affordable segments discussed below are presented on a proportionate basis and exclude the results of four conventional properties with 142 apartment homes and 19 affordable properties with 1,276 apartment homes that we do not manage.
We do not include property management revenues, offsite costs associated with property management or casualty-related amounts in our assessment of segment performance. Accordingly, these items are not allocated to our segment results discussed below. Refer to Note 10 in the condensed consolidated financial statements in Item 1 for further discussion regarding our reportable segments, including a reconciliation of these proportionate amounts to consolidated rental and other property revenues and property operating expenses. Conventional Real Estate Operations
Our conventional segment consists of properties we classify as Conventional Same Store, Conventional Redevelopment and Other Conventional properties. Conventional Same Store properties are properties we manage, in which our ownership exceeds 10% and that have reached and maintained a stabilized occupancy (greater than 90%) during the current year-to-date and prior year-to-date periods. Conventional Redevelopment properties are those in which a substantial number of available apartment homes have been vacated for major . . .

  Add AIV to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for AIV - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.