Aimco Reports Third Quarter 2020 Results
October 29, 2020 at 17:06 PM EDT
Apartment Investment and Management Company (“Aimco”) (NYSE: AIV) announced today third quarter results for 2020.
Chairman and Chief Executive Officer Terry Considine comments: “The third quarter 2020 was filled with challenges and successes. The challenge of the pandemic to property operations was compounded by after-effects including economic volatility and a new era of work from home, government regulation of rent setting and rent collection, rioting and a general unsettling of public order. Aimco provided its residents safety, a refuge from the virus, good neighbors, respectful treatment for all, and a helping hand to those in need. While the experience of this year makes me cautious, it seems that the worst is behind us. We have seen steady improvement during the third quarter. We expect that trend to continue through the fourth quarter and into the new year.”
“During the third quarter, Aimco sold a 39% interest in a $2.4 billion portfolio of California properties. This enabled a $1B reduction in financial leverage.”
“Also during the third quarter, Aimco announced a Board-led plan, informed by active and regular engagement with shareholders, to reduce financial risk and execution risk, and to increase FFO per share by division of the Aimco business between two public entities. The first with 90% of Aimco capital will be known as Apartment Income REIT or “AIR”. It will own only stabilized apartment communities, eliminating vacancy loss during redevelopment and allowing substantial reduction in execution risk and offsite costs. Leverage will be reduced by $2B by selling assets. The California joint venture discussed above resulted in the first $1B reduction in financial leverage. The second $1B will be achieved by the separation transaction scheduled to close before year-end. The second entity with 10% of Aimco capital will be known as Aimco, or sometimes for clarity, as “new” Aimco. It will hold the non-traditional assets, such as the Parkmerced loan and the Brickell land assembly. New Aimco will continue and seek to grow the development and redevelopment business and it will complete the redevelopment projects now underway or about to be started. After a defined transition period, the two businesses will be wholly separate. From the start, each will have separate boards of directors and separate management teams. The separation has been structured to refresh the tax basis of the properties to be held by AIR, eliminating or reducing the need for future stock dividends. Shareholders will own the same assets before and after the separation transaction but will gain the opportunity to make individual allocations between the two businesses.
“Looking forward, I am excited about the prospects for both AIR and New Aimco. We will publish more information soon in the Forms-10 now being reviewed by the SEC. I believe that the separation will unlock significant shareholder value.”
Chief Financial Officer Paul Beldin adds: “For the current, combined Aimco, third quarter pro forma FFO of $0.61 per share was down 5% year-over-year. $0.07 per share in higher income from the Parkmerced mezzanine loan and from lower offsite costs was more than offset by $0.09 per share of lower occupancy and other COVID-related impacts detailed on page three and a $0.01 net impact of property sales. Same Store Residential Net Rental Income was down in the third quarter by 2.5%. In our stable, mostly suburban markets, which include approximately 70% of our Same Store apartment homes, this same measure was up 60 basis points. Specific urban submarkets fared worse with Same Store Residential Net Rental Income down by 7.1%.”
Financial Results: Third Quarter AFFO Per Share Down 5%; Year-to-date Up 4%
* Primarily separation costs and prepayment penalties, see Supplemental Schedule 1 for a detailed list of pro forma adjustments to FFO.
** See COVID-19 Response Update in this earnings release for detail on impacts directly related to Aimco’s response to COVID-19 and the related governmental shut-down of the economy.
Net Income (per diluted common share) – Year-over-year, third quarter net income decreased due primarily to increased prepayment penalties incurred due to third quarter 2020 payoff activity and higher other expenses due to costs incurred on the previously announced planned separation of Aimco’s development activities.
Pro forma FFO (per pro forma diluted common share) – Third quarter Pro forma FFO per share decreased 5% year-over-year. Increased income from the Parkmerced mezzanine loan and lower offsite costs was more than offset by lower occupancy and COVID-19 related impacts, detailed below. Year-to-date, pro forma FFO per share was up 3% year-over-year.
COVID-19 Response Update
Aimco’s top priority is the health and safety of its residents and teammates. Accordingly, Aimco has implemented enhanced cleaning procedures as well as physical distancing and remote working guidelines at its communities and corporate offices. Additionally, seeing residents as individuals, each impacted differently by the pandemic and lockdown, Aimco teammates have undertaken to speak to every resident in need, to listen, and to help each to solve his or her problems. Aimco also seeks to assist the communities where its residents and employees live and work.
Aimco estimates that, in addition to decreased occupancy and lower rental rates, it incurred $9.5 million in the third quarter, $22.6 million year-to-date, of incremental costs. The table below provides additional detail.
Rent Collection Update
Residential Rent Collection – Aimco measures residential rent collection as the amount of payments received as a percentage of all residential amounts owed. The table below represents the percentage of second and third quarter 2020 residential billed amounts.
In the third quarter, Aimco recognized 98.1% of all residential revenue treating the balance of 1.9% as bad debt. Of the 98.1% of residential revenue recognized, Aimco collected in cash all but 140 basis points. The amounts uncollected and not reserved as bad debt include balances collateralized by security deposits, of approximately 60 basis points, and those considered collectable based on Aimco review of individual customers’ credit, of approximately 80 basis points, or $1.6 million.
Of the 190 basis points of bad debt the majority, or approximately 130 basis points, is attributed to residents who have not paid April and subsequent rents. Prior to the enactment of restrictive city ordinances and closed court houses, these residents would have paid rent or faced eviction in ordinary course. The remaining amount, approximately 60 basis points, is attributed to non-payment of rent and other charges as might be expected in a difficult economy. The bad debt associated with this latter category started to slow in August and has declined in each subsequent month. Looking forward, we expect the decline to continue until reaching a more normal level of approximately 30 basis points in 2021. Aimco also expects the emergency ordinances that allow residents to live rent free to unwind providing the opportunity to re-rent these apartments to rent-paying residents.
October rent collections have been consistent with September collections at the same day of the month.
Operating Results: Third Quarter Same Store NOI Down 6.3%; Year-to-Date NOI Down 0.9%
Components of Same Store Revenue Growth – Same Store Revenue growth was impacted by lower average daily occupancy, increased bad debt expense, waived late fees, and reduced commercial rents. The table below summarizes the change in the components of Aimco Same Store revenue growth.
Same Store Rental Rates – Aimco measures changes in rental rates by comparing, on a lease-by-lease basis, the effective rate on a newly executed lease to the effective 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 for leases executed in the respective period.
*As of October 28, 2020. October results are considered preliminary.
Same Store Markets – Aimco’s portfolio is intentionally diversified by geography and price point, it is also diversified with a mix of urban and suburban communities. Third quarter revenue growth differed significantly based on geography and the density of the area surrounding the community.
Suburban properties include 19,083 units, or approximately 70% of Aimco’s Same Store portfolio. In these communities ADO was 95.7%, turnover was 39.6%, blended rates were near flat, and residential net rental income was up 0.6%.
Urban markets include 8,527 units of Aimco’s Same Store portfolio. In these communities ADO was 89.5%, turnover was 47.0%, blended rates were down 6.7%, and residential net rental income was down 7.1%.
Specifically, in Center City and University City Philadelphia, Aimco communities have faced a sharp decline in demand from local universities announcing virtual learning for the fall semester; fewer workers in downtown office buildings, including both Comcast towers, due to work from home policies; and disruption to leasing activity from social unrest.
In Mid-Wilshire and West Los Angeles, bad debt has been elevated due to local regulations which have the effect of permitting residents to live rent-free. Demand from the recovering entertainment industry is returning and leasing pace was up 44% year-over-year in the third quarter.
On the San Francisco Peninsula in Northern California, work from home policies at major tech companies disrupted demand in San Mateo and Redwood City. The Pacifica neighborhood was impacted but has stabilized and our communities in San Jose, Marin County, and the East Bay have performed well.
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 third quarter, Aimco invested $57 million in redevelopment and development. Aimco continued 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; and ground-up construction at The Fremont on the Anschutz Medical Campus in Aurora, Colorado; Eldridge Townhomes in Elmhurst, Illinois; and Prism in Cambridge, Massachusetts. Aimco’s estimated cost to complete these projects is $110 million, an amount readily funded from Aimco’s liquidity.
At Parc Mosaic in Boulder, Colorado, construction is complete and, as of October 28, 2020, Aimco has leased 97% of the apartment homes at rents consistent with underwriting.
At The Fremont, on the Anschutz Medical Campus, as of October 28, 2020, just over 100 apartment homes have been delivered and 82% have been leased. Completion of this 253-apartment home community is expected in the fourth quarter.
At Eldridge Townhomes in Elmhurst, Illinois, construction is now complete and 57 of the 58 have been leased.
At 707 Leahy in Redwood City, California, 60 of the 110 apartment homes have been completed and, as of October 28, 2020, 82% of those have been leased.
At Prism in Cambridge, Massachusetts, completion of this 136-apartment home property is expected in the first quarter of 2021.
During the third quarter, Aimco leased 144 redeveloped or newly developed apartment homes. At September 30, 2020, Aimco’s exposure to lease-up at long-cycle redevelopment and development communities was 684 apartment homes; 36 homes where construction is complete, 171 homes expected to be completed before year-end, and 477 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.
* NOI margin is lower than Aimco’s Same Store NOI margin of 71% due primarily to the impact of Redevelopment communities that are not yet stabilized. As these communities stabilize, we expect NOI margin to be equal to, or better than, Aimco Same Store NOI margin.
Third Quarter Portfolio – For its entire portfolio, Aimco’s average monthly revenue per apartment home was $2,212 for third quarter 2020, a 2% decrease compared to third quarter 2019.
Acquisitions – Aimco follows a disciplined paired trade policy in making investments. Aimco evaluates potential acquisitions seeking Free Cash Flow internal rates of returns higher than those of the properties 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.
In the third quarter, Aimco acquired for $90 million, Hamilton on the Bay, located in Miami’s Edgewater neighborhood. The acquisition includes a 271-apartment home community located on the waterfront, approximately one mile north of Aimco’s Bay Parc apartments, plus an adjacent development site. Current zoning allows for the construction of more than 380 additional apartment homes on the combined sites. Aimco is now in planning to invest as much as $50 million in a substantial renovation of the existing building.
Aimco continues to search for accretive acquisitions, including development opportunities.
Dispositions – During the third quarter, we received a non-refundable deposit securing a contract to purchase an apartment community expected to be sold later in the fourth quarter at a price of $126 million, 3% better than its estimated gross asset value at December 31, 2019. Proceeds from this transaction are expected to be used to reduce leverage.
Year-to-date, Aimco has sold one apartment community generating net proceeds of $37 million.
Joint Venture Transaction – As previously announced, in September, Aimco formed a joint venture with a passive institutional investor to own a portfolio of 12 multi-family communities with 4,051 apartment homes located in California.
The properties were valued at $2.40 billion, or approximately $592,000 per unit, equivalent to an implied NOI cap rate of approximately 4.2%. The valuation is equal to 97% of Aimco’s pre-COVID-19 valuation of the properties and confirms Aimco’s previously published NAV. The joint venture has existing property debt of $1.22 billion and an implied equity value of $1.18 billion. In exchange for a 39% interest subject to $475 million of property debt, Aimco received $461 million. Aimco retains ownership of 61% of the joint venture and will control and operate the properties in exchange for property and asset management fees.
RBC Capital Markets acted as the Exclusive Financial Advisor to the joint venture.
Life Science Developer Investment – In the third quarter, Aimco made a $50 million commitment to IQHQ, a privately-held life-sciences real estate development company. In addition, Aimco gained the right to collaborate with IQHQ on any multifamily component at its future development sites.
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, accruing if not paid from property operations. In the third quarter, Aimco accrued all interest due, as provided by the loan agreement, consistent with GAAP, and considering that the loan is senior to approximately $300 million of borrower equity.
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, the term loan, 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.
**During the third quarter, Aimco reduced Net Leverage by approximately $1 billion through the California Joint Venture transaction.
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.
Under its revolving credit facility and term loan, 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 September 30, 2020, Aimco’s fixed charge coverage ratio was 1.93x. Aimco expects to remain in compliance with its covenants.
During the third quarter, Aimco prepaid $405 million of property debt using proceeds from the previously announced joint venture, incurring $7.8 million in prepayment penalties that have been excluded from Pro forma FFO. The loans had a weighted-average interest rate of 5.3%, lowering Aimco’s weighted-average cost of leverage by 15 basis points. The prepayment of property debt lowers Aimco’s interest expense such that the costs associated with the prepayment will be recovered in the first quarter of 2021. Aimco has no remaining debt maturities in 2020.
Aimco uses its credit facility primarily for working capital and other short-term purposes and to secure letters of credit. At September 30, 2020, Aimco’s share of cash and restricted cash was $249 million and it had the capacity to borrow up to $793 million under its revolving credit facility, bringing total liquidity to more than $1.0 billion.
Aimco also manages its financial flexibility by maintaining an investment grade rating and holding communities that are unencumbered by property debt. As of September 30, 2020, Aimco held unencumbered communities with an estimated fair market value of approximately $3.6 billion.
2020 property sales, including the California Joint Venture, generated taxable gains in excess of the company’s regular quarterly dividend. On October 21, 2020 Aimco’s Board of Directors declared a $8.20 special dividend in the form of cash and stock.
The special dividend includes the next two quarterly cash dividends, or $0.82 per share in the aggregate, accelerating the payment of the regular dividend expected in February of 2021. Additionally, shareholders in the aggregate will receive $7.38 per share in stock.
The dividend will be payable to shareholders of record on the close of business on November 4, 2020, with shareholders having the opportunity to elect to receive the special dividend in the form of all stock or prorated cash and stock, and will be paid on November 30, 2020, after trading hours. The number of shares distributed in the special dividend will be determined by the volume weighted average price (“VWAP”) of AIV shares during the 10-trading day period ending on November 24, 2020.
In order to neutralize the dilutive impact of the stock issued in the special dividend, Aimco's Board also authorized a reverse stock split, effective on November 30, 2020, immediately following the special dividend. As a result, total shares outstanding following completion of both the special dividend and the reverse stock split are expected to be unchanged from the total shares outstanding immediately prior to the dividend. Some stockholders may have more Aimco shares and some may have fewer based on their individual elections. The reverse split will ensure comparability of Aimco per share results before and after these transactions.
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 126 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 2020 and 2021 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; Aimco liquidity and leverage metrics; statements regarding Aimco’s and AIR’s portfolio composition and their relationship following the separation; the anticipated timing, structure and benefits of the separation; and future dividends. In addition, we may not complete the separation at all. We caution investors not to place undue reliance on any such forward-looking statements.
These forward-looking statements are based on management’s judgment as of this date, which is subject to risks and uncertainties. Risks and uncertainties that could cause actual results to differ materially from our expectations include, but are not limited to: whether or not Aimco completes the separation on anticipated terms or at all; the effects of the coronavirus pandemic on Aimco’s and AIR’s business and on the global and U.S. economies generally, and the ongoing, dynamic and uncertain nature and duration of the pandemic, all of which heightens the impact of the other risks and factors described herein, and the impact on entities in which Aimco holds a partial interest, including its interest in the partnership that owns Parkmerced Apartments, and the impact of the lockdown on Aimco’s residents, commercial tenants, and operations; real estate and operating 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 amount, location and quality of competitive new housing supply; the timing and effects of acquisitions, dispositions, redevelopments and developments; changes in operating costs, including energy costs; negative economic conditions in our geographies of operation; loss of key personnel; Aimco’s or AIR’s ability to maintain current or meet projected occupancy, rental rate and property operating results; Aimco’s or AIR’s ability to meet budgeted costs and timelines, and, if applicable, achieve budgeted rental rates related to redevelopment and development investments; expectations regarding sales of apartment communities and the use of proceeds thereof; the ability to successfully operate as two separate companies each with more narrowed focus; insurance risks, including the cost of insurance, and natural disasters and severe weather such as hurricanes; financing risks, including the availability and cost of financing; the risk that cash flows from operations may be insufficient to meet required payments of principal and interest; the risk that earnings may not be sufficient to maintain compliance with debt covenants, including financial coverage ratios; legal and regulatory risks, including costs associated with prosecuting or defending claims and any adverse outcomes; the terms of laws and governmental regulations that affect us and interpretations of those laws and regulations; possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of apartment communities presently or previously owned by Aimco; Aimco’s and AIR’s relationship with each other after the consummation of the business separation; the ability and willingness of Aimco and AIR and their subsidiaries to meet and/or perform their obligations under any contractual arrangements that are entered into among the parties in connection with the business separation and any of their obligations to indemnify, defend and hold the other party harmless from and against various claims, litigation and liabilities; and the ability to achieve some or all the benefits that we expect to achieve from the business separation; and such other risks and uncertainties described from time to time in filings by Aimco or AIR with the Securities and Exchange Commission.
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 section entitled “Risk Factors” in Item 1A of Aimco’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, and the other documents Aimco files from time to time with the Securities and Exchange Commission. Readers should also carefully review the “Risk Factors” section of the registration statements relating to the business separation, which are expected to be filed with the Securities and Exchange Commission. These filings identify and address other important risks and uncertainties that could cause actual events and results to differ materially from those contained in the forward-looking statements.
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.
 Other expenses, net, for the three and nine months ended September 30, 2020, is inclusive of $11.9 million and $12.6 million, respectively, of transaction costs related to the separation of Aimco’s development activities.
 Interest expense for the three and nine months ended September 30, 2020, is inclusive of $7.9 million and $14.5 million, respectively, of prepayment penalties related to debt prepaid during the year.
Included in net income for the three and nine months ended September 30, 2020 are the $9.5 million and $22.6 million, respectively, of COVID-19 related impacts detailed in the COVID-19 Response Update included in this earnings release.