Aimco Reports Third Quarter Results

Business Wire 1-Nov-2018 4:36 PM

Apartment Investment and Management Company ("Aimco") (NYSE:AIV) announced today third quarter results for 2018.

Chairman and Chief Executive Officer Terry Considine comments: "In the third quarter, Aimco produced solid results driven by a successful leasing season. Same Store revenue was up 3.1% year-over-year, driven by higher average monthly rent per apartment home of 2.9% and an increase in average daily occupancy of 30 basis points. Third quarter results set us up nicely for the balance of this year and position us well for 2019."

"Compared to one year ago, we expect to begin the new year with approximately 30 basis points higher occupancy and 30 basis points greater earn-in contribution from our year-end rent roll, plus incremental contribution from completed redevelopment communities, including Park Towne Place, The Sterling, and Saybrook Pointe, and better than underwritten contribution from our 2018 acquisitions of Bent Tree and the Philadelphia portfolio."

Chief Financial Officer Paul Beldin adds: "Third quarter 2018 AFFO of $0.56 per share was $0.05 per share ahead of the midpoint of our guidance range, and Pro forma FFO of $0.63 per share was $0.03 per share ahead of the midpoint of guidance. AFFO exceeded the midpoint of our expectations due to $0.02 per share from better operating results; $0.01 per share from a number of other items; and $0.02 per share from the timing of capital replacement spending, which we expect to reverse in the fourth quarter."

"In late September, due to solid results during the summer leasing season, we increased full year 2018 guidance for Same Store revenue growth to 3.0%, the high end of our prior guidance range; Same Store NOI growth to between 2.9% and 3.1%, the midpoint of which matches the high end of our prior guidance range; and AFFO by $0.01 per share, at the midpoint. We are now increasing 2018 AFFO guidance a second time by an additional $0.02 per share, to a range of $2.14 to $2.18."

Financial Results: Third Quarter AFFO Up 4%

Net Income (per diluted common share) - Year-over-year, third quarter net income increased primarily due to higher gains on the sale of apartment communities and the Asset Management business, partially offset by increased operating expenses.

AFFO (per diluted common share) - Aimco's third quarter AFFO per share increased $0.02 year-over-year. Real estate operations contributed to the increase in AFFO, as follows:

• $0.02 from Same Store Property Net Operating Income growth of 2.6%, driven by a 3.1% increase in revenue, offset by a 4.5% increase in expenses; and
• $0.06 from leasing activity related to Redevelopment and recently acquired communities; offset by
• ($0.06) in AFFO from apartment communities sold in the last twelve months.

The sale of the Asset Management business is estimated to have reduced third quarter AFFO per share by $0.03.

Operating Results: Third Quarter Same Store NOI Up 2.6%; YTD Up 2.8%

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 either as 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.

Renewal rates in the third quarter were 40 bps lower year-over-year due to the decision to increase occupancy in certain markets, including Denver and Chicago.

Redevelopment

Redevelopment is Aimco's second line of business where Aimco creates value by repositioning communities within the Aimco portfolio. Aimco also undertakes limited ground-up development when warranted by risk-adjusted investment returns, either directly or in connection with the 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 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 $37 million in redevelopment and development. In Center City, Philadelphia, Aimco substantially completed redevelopment of the vacated fourth and final tower of Park Towne Place. For the third quarter, average daily occupancy at the three completed towers was 89.1%. At September 30, 2018, the three completed towers were 95% leased and the fourth tower was 71% leased.

Aimco also commenced the next phase of redevelopment at its Flamingo community, located in Miami Beach. This $30 million phase includes extensive redevelopment of retail, leasing, and common areas, including major enhancements to the entryway.

In September, Aimco exercised its option to acquire approximately two acres of land adjacent to its 21 Fitzsimons community, located on the University of Colorado Anschutz Medical Campus, and broke ground on the development of a 253-apartment home community. Aimco expects to invest approximately $87 million to construct the community, which is expected to be complete in the third quarter of 2020. Aimco anticipates a stabilized net operating income yield in the low 6% range, driven by an 80% net operating income margin due to operational efficiencies derived from owning the adjacent 600 apartment homes, and a Free Cash Flow internal rate of return greater than 10%, resulting in value creation (defined as the amount by which the completed property value exceeds the pre-redevelopment value plus redevelopment spend) of more than 35%.

During the third quarter, Aimco leased 145 apartment homes at Redevelopment communities. At September 30, 2018, Aimco's exposure to lease-up at active redevelopment and development communities was approximately 341 apartment homes, of which 62 were in the fourth tower of Park Towne Place, 213 were being constructed at Parc Mosaic, and 66 were located in three other communities.

Subsequent to quarter end, Aimco commenced construction on the development of 58 rental townhomes on approximately four acres of land contiguous to the Elm Creek apartment community in Elmhurst, Illinois. Given the success of a similar project five years ago at the community, Aimco opportunistically purchased an adjacent land parcel in 2017. Aimco expects to achieve a stabilized net operating income yield of 7% and a Free Cash Flow internal rate of return greater than 11% on this $35 million investment. Aimco expects initial occupancy in the first quarter of 2020 and completion of construction in the second quarter of 2020.

Portfolio Management: Revenue Per Apartment Home Up 6% to $2,131

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.

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, occasional developments, and selective acquisitions with projected Free Cash Flow internal rates of return higher than expected from the communities being sold. Through this disciplined approach to capital recycling, Aimco significantly increases the quality and expected growth rate of its portfolio.

Third Quarter Real Estate Portfolio - For its entire portfolio, Aimco's average monthly revenue per apartment home was $2,131 for third quarter 2018, a 6% increase compared to third quarter 2017. This increase is due to year-over-year growth in Same Store revenue as well as Aimco's acquisition activities, lease-up of redevelopment and acquisition communities, and sale of communities with average monthly revenues per apartment home lower than those of the retained portfolio.

Acquisitions - Aimco evaluates potential acquisitions with an eye for unique and opportunistic investments and funds acquisitions pursuant to its strict paired trade discipline. Aimco did not complete any acquisitions in the third quarter.

Year-to-date, Aimco has acquired five communities. Aimco acquired for $308 million four apartment communities in the Philadelphia area including 665 apartment homes and 153,000 square feet of office and retail space. Aimco also acquired for $160 million Bent Tree Apartments, a 748-apartment home community in Fairfax County, Virginia.

As previously announced, in April 2018 Aimco agreed to acquire six communities in the Philadelphia area, including the four that have been acquired year-to-date. During the third quarter, Aimco terminated its agreement to acquire the fifth community, The Victor, in Camden, New Jersey, due to the lack of required approvals from the City of Camden. The purchase of the sixth community is expected upon completion of construction in the first half of 2019. The rate of return expected on Aimco's investment in the Philadelphia communities is not materially impacted by the removal of The Victor.

Dispositions - During the third quarter, Aimco sold for $590 million its Asset Management business and four affordable apartment communities located in the Hunters Point area of San Francisco. After payment of transaction costs and repayment of property-level debt encumbering the Hunters Point apartment communities, net proceeds to Aimco were $512 million.

Aimco also sold for $170 million Chestnut Hill Village, an 821-apartment home community located in north Philadelphia. Net proceeds to Aimco were $166 million.

Aimco used proceeds from the two sales to fund previously completed 2018 acquisitions, effectively completing the paired trades. The sale of Chestnut Hill Village rebalanced Aimco's capital allocation to Philadelphia from a lower-rated apartment community in north Philadelphia to communities in the more desirable Center City and University City submarkets. The acquisition communities have expected Free Cash Flow internal rates of return approximately 400 basis points higher than those of the disposition communities.

Aimco used excess proceeds from these sales to repay in full the revolving credit facility and term loan, reduce property-level borrowings, fund share repurchases, and for general corporate purposes.

Balance Sheet

Aimco Leverage

Aimco's leverage strategy seeks to increase financial returns while using leverage with appropriate caution. Aimco limits risk through balance sheet structure, employing low leverage, primarily non-recourse and long-dated property debt; builds financial flexibility by maintaining ample unused and available credit as well as holding properties with substantial value unencumbered by property debt; and uses partners' capital when it enhances financial returns or reduces investment risk.

Aimco total leverage includes Aimco share of long-term, non-recourse, property debt encumbering apartment communities, outstanding borrowings under its revolving credit facility, and outstanding preferred equity.

Leverage Ratios

Aimco target leverage ratios are Proportionate Debt and Preferred Equity to Adjusted EBITDA below 7.0x and Adjusted EBITDA to Interest Expense and Preferred Dividends greater than 2.5x. Aimco calculates Adjusted EBITDA, Pro forma EBITDA, and Adjusted Interest Expense used in its leverage ratios based on current quarter amounts, annualized.

Aimco's Adjusted EBITDA has been adjusted on a pro forma basis to reflect the dispositions of Chestnut Hill Village, the Asset Management business, and the four Hunters Point communities during the period as if the transactions had been closed on July 1, 2018.

Aimco expects its Proportionate Debt to Adjusted EBITDA and Proportionate Debt and Preferred Equity to Adjusted EBITDA ratios to decrease to 6.3x and 6.7x, respectively, before year-end.

Refinancing Activity

Entering the third quarter, Aimco had $1.6 billion in debt scheduled to mature between 2019 and 2021 and $125 million of 6.875% preferred stock callable in 2019. During third quarter, Aimco repaid $120 million of property debt. As previously announced, Aimco intends to redeem the preferred stock in May 2019. Aimco is addressing the majority of these remaining maturities and has rate-locked $620 million of non-recourse, property loans: $500 million of these loans are fixed-rate with a weighted average maturity of nine years and a weighted average interest rate of 4.17%, and $120 million of these loans have five-year terms and interest rates floating at a weighted average of 115 basis points over 30-day LIBOR. In connection with fourth quarter expected refinancing activity, Aimco expects to incur approximately $14 million of debt extinguishment costs, which will be excluded from Pro forma FFO and AFFO in fourth quarter 2018 and for the full year 2018.

Share Repurchases

Subsequent to quarter-end, Aimco repurchased 1.7 million shares of its common stock for a total of $75 million, at a weighted average price of $43.89 per share, approximately a 20% discount to Aimco's first quarter 2018 estimated Net Asset Value per share.

Liquidity

At September 30, 2018, Aimco held cash and restricted cash of $104 million and had the capacity to borrow $593 million under its revolving credit facility, after consideration of $7 million of letters of credit backed by the facility. Aimco uses its credit facility primarily for working capital and other short-term purposes and to secure letters of credit.

Aimco also manages its financial flexibility by maintaining an investment grade rating and holding apartment communities that are unencumbered by property debt. At September 30, 2018, Aimco held unencumbered apartment communities with an estimated fair market value of approximately $2.3 billion.

Dividend - As previously announced, the Aimco Board of Directors declared a quarterly cash dividend of $0.38 per share of Class A Common Stock for the quarter ended September 30, 2018. On an annualized basis, this represents an increase of 6% compared to the dividends paid during 2017. This dividend is payable on November 30, 2018, to stockholders of record on November 16, 2018.

2018 Outlook

Earnings Conference Call Information

Supplemental 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 ("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.

About Aimco

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 133 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.

Forward-looking Statements

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 fourth quarter and full year 2018 results, including but not limited to: 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: 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 redevelopments and developments; 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:

• Real estate and operating risks, including fluctuations in real estate values and the general economic climate in the markets in which Aimco operates 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 of acquisitions, dispositions, redevelopments and developments; and changes in operating costs, including energy costs;
• Financing risks, including the availability and cost of capital markets' financing; the risk that cash flows from operations may be insufficient to meet required payments of principal and interest; and the risk that earnings may not be sufficient to maintain compliance with debt covenants;
• Insurance risks, including the cost of insurance, and natural disasters and severe weather such as hurricanes; and
• Legal and regulatory risks, including costs associated with prosecuting or defending claims and any adverse outcomes; the terms of governmental regulations that affect Aimco and interpretations of those regulations; and 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.

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, 2017, 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.

View source version on businesswire.com: https://www.businesswire.com/news/home/20181101006154/en/