Aimco Reports First Quarter 2020 Results
May 07, 2020 at 17:14 PM EDT
Apartment Investment and Management Company (“Aimco”) (NYSE: AIV) provided today a COVID-19 update and announced first quarter results for 2020.
Chairman and Chief Executive Officer Terry Considine comments: “The Aimco business began the year with record effectiveness and record profitability. In mid-March, as you all know, the world changed. A famous observation goes: ‘There are decades when nothing happens; and there are weeks when decades happen.’ The last few weeks of March were a time when it seemed that ‘decades’ were happening!”
“The combination of the public health crisis and the severe economic contraction made the business environment quite challenging. While there were plenty of reasons for concern, it helped that we had designed Aimco with hard times in mind. That is why we give such importance to customer selection and customer satisfaction, and work so hard to control property expenses; why we prefer short-cycle redevelopment to less flexible ground-up development; why our portfolio is so diversified by geography and price point; why our leverage is primarily long-dated, non-recourse property debt; and why our intentional culture emphasizes flexibility and initiative, collaboration and personal responsibility.”
Aimco’s Response to the COVID-19 Pandemic - Here’s how Aimco responded to the COVID-19 pandemic:
As the crisis approached, Aimco made the health and safety of teammates its priority. Aimco:
Customer focus led Aimco to make its properties safer by increasing cleaning, reducing opportunities for infection, and limiting in-person interactions with neighbors and site teams. Aimco:
Aimco’s Board of Directors was fully informed and fully engaged, including two candidates for the board who were not formally elected until the end of April. During March and April, Aimco delivered five management reports, made numerous calls, asked individual directors for specific assistance, and held four virtual board meetings.
Knowing the importance of financial liquidity and building on $650 million of cash and committed credit at the start of 2020, Aimco drew down $300 million on its bank lines, reduced expected 2020 capital spending by $150 million, or almost one-half, and undertook to increase available credit by another $720 million: a $350 million bank term loan and approximately $370 million in proceeds from property loans, of which half are closed or rate-locked and half closing over the next 30 days.
Preliminary 2nd Quarter Information
Effective in April, Aimco revised its estimation of residential bad debt to consider creditworthy residents and their guarantors who choose to withhold rent payments.
Aimco’s new methodology accelerated the estimate of collectability to month-end based on its assessment of the creditworthiness of the tenants and third-party guarantors, based on their FICO scores. Previously, Aimco evaluated collectability of balances only after such balances were more than 30 days past due. Using the new methodology, April residential bad debt expense was approximately 1% of revenues, or $670k; an increase of $270k from what would have been the result using Aimco’s former methodology.
Aimco also reviewed the viability of its commercial tenants and the related accounting assets for straight-line rents and deferred broker commissions.
Approximately $2.5 million, or 3.5%, of Aimco’s monthly revenue is derived from commercial tenants, about one-half office uses and one-half other commercial uses. In April, Aimco collected 90% of amounts due from office tenants and 30% of rents from the other commercial users.
US GAAP requires revenue subject to long-term leases to be recognized in a ratable, or straight-line, manner over the life of the lease. In practice, this results in GAAP income in excess of cash receipts in the early years of a lease. Additionally, GAAP requires broker commissions paid for origination of the lease to be deferred and recognized over the life of the lease. Entering 2020, Aimco had recognized $6.7 million of GAAP rental revenue in-excess of cash rent and had deferred $3.8 million of broker commissions. Based on the expected economic impact of COVID-19 and the recession at hand, Aimco wrote off, in the first quarter, $2.9 million of its straight-line rent receivable and $2.2 million of deferred broker commissions related to leases to commercial tenants with retail, restaurant, and fitness uses. Monthly rent for these tenants is approximately $0.6 million and future rental revenue will be recognized on a cash basis.
Redevelopment and Development
When the current crisis became apparent, Aimco paused all of its short-cycle redevelopment and property upgrade activities. Together with other projects that had been slated to start later this year, Aimco reduced expected 2020 capital spending by 45%, or $150 million.
Aimco is continuing construction of five long-cycle redevelopments and developments currently underway. These five apartment communities have an estimated remaining cost to complete of approximately $212 million; approximately $140 million of which is expected to be spent in 2020. Three are expected to be completed in 2020 and two are expected to be completed in 2021. When stabilized, these communities are expected to contribute approximately $30 million of additional net operating income.
Liquidity and Leverage
Today, Aimco has $1 billion of liquidity: summing cash on hand; availability under our revolving credit facility; and excess proceeds on rate-locked debt closing in the next few weeks. This liquidity will increase by an additional $200 million, as in-process property loans close over the next 30 days.
In total, Aimco is placing $688 million of new property debt, generating incremental proceeds of $367 million. Aimco has closed or rate-locked $326 million of the new property loans. These loans have a weighted-average term to maturity of 8.3 years and a weighted-average interest rate of 2.9%, lowering Aimco’s overall borrowing costs by five basis points. When these financings, and the property loans currently in process, are completed, Aimco will have no loan maturities in 2020 and will have reduced 2021 to 2024 maturities by $229 million; resulting in average annual maturities of $265 million for the four years 2021 to 2024.
Aimco’s balance sheet is safe and provides flexibility and abundant liquidity. Leverage, as measured by leverage-to-EBITDA, remains above targeted levels. Aimco expects to reduce leverage to targeted levels through increased EBITDA from the lease up of the five properties under construction and from property sales.
In early May, Aimco sold an apartment community located in Annandale, Virginia at a price of $58.9 million, equal to its estimated gross asset value at December 31, 2019.
Financial Results: First Quarter FFO Per Share Up 10%; AFFO Per Share Up 9%
Chief Financial Officer Paul Beldin comments: “Aimco’s first quarter was solid with AFFO of $0.60 per share, equal to the midpoint of the guidance provided at the beginning of the year, and up 9% year-over-year. Better-than-expected Same Store operating results, lower G&A expenses, and the prepayment of a seller financed note combined to outperform our expectations by $0.03. This outperformance was offset by $0.4 million of COVID-19 related costs; and $5.1 million of charges related to the previously discussed straight-line rent and deferred broker commission adjustments. FFO of $0.67 per share was a penny ahead of the midpoint of guidance, and up 10% year-over-year.”
Net Income (per diluted common share) – Year-over-year, first quarter net income decreased due primarily to lower gains from dispositions.
Adjusted Funds from Operations (per pro forma diluted common share) – Aimco’s first quarter AFFO per share increased $0.05 year-over-year due primarily to a $0.05 increase in Same Store Property Net Operating Income.
Operating Results: First Quarter Same Store NOI Up 5.0%
Same Store Rental Rates – Aimco measures changes in rental rates by comparing, on a lease-by-lease basis, the rate on a newly executed lease to the rate on the expiring lease for that same apartment. Newly executed leases are classified as either a new lease, where a vacant apartment is leased to a new customer, or as a renewal. The table below details changes in new and renewal lease rates, as well as the weighted-average (blended) lease rates.
In April, weighted-average rent increases were 50 basis points higher than increases in April 2019 and Average Daily Occupancy was 40 basis points lower year-over-year.
Redevelopment and Development
Redevelopment is Aimco’s second line of business where Aimco creates value by repositioning communities within the Aimco portfolio. Aimco also undertakes ground-up development when warranted by risk-adjusted investment returns, either directly or in connection with redevelopment of an existing apartment community. Aimco invests to earn risk-adjusted returns in excess of those expected from the apartment communities sold in “paired trades” to fund the redevelopment and development. Of these two activities, Aimco generally favors redevelopment because it permits adjustment of the scope and timing of spending to align with changing market conditions and customer preferences.
During the first quarter, Aimco invested $67 million in redevelopment and development. In March, as mentioned above, Aimco paused investment in its short-cycle redevelopment projects and delayed the start of new projects. Aimco intends to continue five long-cycle redevelopment and development projects already under construction, including the full redevelopment of the North Tower at Flamingo Point in Miami Beach, Florida, and 707 Leahy in Redwood City, California; ground-up construction at The Fremont on the Anschutz Medical Campus in Aurora, Colorado; Eldridge Townhomes adjacent to its Elm Creek apartment community in Elmhurst, Illinois; and Prism in Cambridge, Massachusetts. Aimco’s estimated cost to complete these projects is $212 million, an amount equal to 1.5% of Aimco’s estimated gross asset value and readily funded from Aimco’s liquidity.
In the first quarter, Aimco substantially completed construction at Parc Mosaic in Boulder, Colorado. As of March 31st, Aimco had leased 69% of the apartment homes at rents exceeding underwriting.
In March, complying with local COVID-19 related restrictions, construction activities were halted temporarily at 707 Leahy in Redwood City, California. On May 4th, restrictions were eased and construction activities resumed. Completion of construction, previously expected in the second quarter, is now expected in the third quarter.
In July 2019, Aimco announced the acquisition of an under-development apartment community located in Cambridge, Massachusetts, now called Prism. The City has halted all construction. Assuming the current ban is lifted by early summer, completion of this 136-unit property is expected in the first quarter of 2021.
During the first quarter, Aimco leased 73 redeveloped or newly developed apartment homes. At March 31, 2020, Aimco’s exposure to lease-up at long-cycle redevelopment and development communities was 892 apartment homes; 70 homes where construction is complete, 347 homes expected to be delivered during the remainder of 2020, and 475 homes expected to be delivered in 2021.
Aimco’s portfolio of apartment communities is diversified across “A,” “B,” and “C+” price points, averaging “B/B+” in quality and is also diversified across several of the largest markets in the United States.
Portfolio Strategy – Aimco follows a disciplined paired trade policy in making investments. As part of its portfolio strategy, Aimco seeks to sell up to 10% of its portfolio annually and to reinvest the proceeds from such sales in accretive uses such as capital enhancements, redevelopments, some developments, and selective acquisitions with projected Free Cash Flow internal rates of return higher than expected from the communities being sold. Aimco prefers well-located real estate where land is a significant percentage of total value and provides potential upside from development or redevelopment. Through this disciplined approach to capital recycling, Aimco increases the quality and expected growth rate of its portfolio.
First Quarter Portfolio – For its entire portfolio, Aimco’s average monthly revenue per apartment home was $2,280 for first quarter 2020, a 5% increase compared to first quarter 2019. This increase is due primarily to year-over-year growth in Same Store revenue, lease-up of redeveloped apartment homes, and sales of communities with average monthly revenues per apartment home lower than those of the retained portfolio.
In the first quarter, Aimco made no acquisitions or dispositions.
Mezzanine Loan Investment – As previously announced, in December 2019, Aimco made a five-year, $275 million mezzanine loan to a partnership owning Parkmerced Apartments, located in southwest San Francisco. The loan bears interest at a 10% annual rate payable from property cash flow. During the first quarter, property operations were 98% of underwriting and Aimco received cash payments of $0.6 million and accrued the remaining amount due. The partnership has made all required loan payments through April. Aimco expects that it will collect all amounts due under the loan and believes that it is well secured by the remedies proved by the loan agreements.
Aimco seeks to increase financial returns by using leverage with appropriate caution. Aimco limits risk through its balance sheet structure, employing low leverage, primarily non-recourse and long-dated property debt; and Aimco builds financial flexibility by maintaining ample unused and available credit; holding properties with substantial value unencumbered by property debt; maintaining an investment grade rating; and using partners’ equity capital when it enhances financial returns or reduces investment risk.
Aimco leverage includes the Aimco share of long-term, non-recourse, property debt encumbering apartment communities, outstanding borrowings under the Aimco revolving credit facility, and other leverage.
* Other leverage includes mezzanine equity instruments, including Aimco Preferred OP Units, redeemable at the holder’s option. Aimco has computed the weighted-average maturity of its total leverage assuming a 10-year maturity for its Preferred OP Units.
Aimco target leverage ratios are Net Leverage to Adjusted EBITDAre below 7.0x and Adjusted EBITDAre to Interest Expense and Preferred Distributions greater than 2.5x. Aimco calculates Adjusted EBITDAre and Adjusted Interest Expense used in its leverage ratios based on current quarter amounts, annualized.
Aimco leverage is expected to be reduced to target levels through the lease up of the five properties under construction and through property sales.
Under its revolving credit facility, Aimco has agreed to maintain a fixed charge coverage ratio of 1.40x, as well as other covenants customary for similar revolving credit arrangements. For the period ended March 31, 2020, Aimco’s fixed charge coverage ratio was 2.08x. Aimco expects to remain in compliance with its covenants.
Aimco uses its credit facility primarily for working capital and other short-term purposes and to secure letters of credit. At March 31, 2020, Aimco held cash and restricted cash of $359 million and had the capacity to borrow up to $199 million under its revolving credit facility, bringing total liquidity to $558 million. After consideration of the financing activities discussed previously, Aimco’s total liquidity is expected to be approximately $1.2 billion.
Aimco also manages its financial flexibility by maintaining an investment grade rating and holding apartment communities that are unencumbered by property debt.
Equity Capital Activities
During the first quarter, Aimco repurchased 0.2 million shares of its common stock for $10 million, at a weighted-average price of $42.79 per share, approximately a 27% discount to Aimco’s estimated Net Asset Value per share.
On April 28, 2020, the Aimco Board of Directors declared quarterly cash dividends of $0.41 per share of Class A Common Stock, an increase of 5% compared to the regular quarterly dividends paid in 2019. This amount is payable on May 29, 2020, to stockholders of record on May 15, 2020.
Earnings Conference Call Information
The full text of this Earnings Release and the Supplemental Information referenced in this release are available on Aimco’s website at investors.aimco.com.
Glossary & Reconciliations of Non-GAAP Financial and Operating Measures
Financial and operating measures found in this Earnings Release and the Supplemental Information include certain financial measures used by Aimco management that are measures not defined under accounting principles generally accepted in the United States, or GAAP. Certain Aimco terms and Non-GAAP measures are defined in the Glossary in the Supplemental Information and Non-GAAP measures reconciled to the most comparable GAAP measures.
Aimco is a real estate investment trust focused on the ownership and management of quality apartment communities located in select markets in the United States. Aimco is one of the country’s largest owners and operators of apartments, with ownership interests in 124 apartment communities in 17 states and the District of Columbia. Aimco common shares are traded on the New York Stock Exchange under the ticker symbol AIV and are included in the S&P 500. For more information about Aimco, please visit our website at www.aimco.com.
This Earnings Release and Supplemental Information contain forward-looking statements within the meaning of the federal securities laws, including, without limitation, statements regarding projected results and specifically forecasts of second quarter and full year 2020 results, including but not limited to: Nareit FFO, Pro forma FFO and selected components thereof; AFFO; Aimco redevelopment and development investments and projected yield on such investments, timelines, and Net Operating Income contribution; expectations regarding sales of Aimco apartment communities and the use of proceeds thereof; and Aimco liquidity and leverage metrics.
These forward-looking statements are based on management’s judgment as of this date, which is subject to risks and uncertainties. Risks and uncertainties include, but are not limited to: the impact of the COVID-19 pandemic, including on Aimco’s ability to maintain current or meet projected occupancy, rental rate and property operating results; the effect of acquisitions, dispositions, redevelopments and developments; Aimco’s ability to meet budgeted costs and timelines, and achieve budgeted rental rates related to Aimco redevelopment and development investments; expectations regarding Aimco sales of apartment communities and the use of proceeds thereof; the availability and cost of property-level and corporate debt; and Aimco’s 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 Aimco’s control, including, without limitation:
In addition, Aimco’s 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 Aimco’s 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 Aimco’s financial statements and the notes thereto, as well as the section entitled “Risk Factors” in Item 1A of Aimco’s Annual Report on Form 10-K for the year ended December 31, 2019, and the other documents Aimco files from time to time with the Securities and Exchange Commission.
These forward-looking statements reflect management’s judgment as of this date, and Aimco assumes no obligation to revise or update them to reflect future events or circumstances. This press release does not constitute an offer of securities for sale.