Aimco Reports Fourth Quarter Results

Business Wire 4-Feb-2019 4:23 PM

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

Chairman and Chief Executive Officer Terry Considine comments: "2018 was a solid year for Aimco. We increased estimated Net Asset Value per share by about 6% which, with our cash dividend, provided shareholders Economic Income of 8.5%. In our Same Store portfolio, we set company records for occupancy and NOI margins. In Redevelopment, we completed two major projects and continued investment in this accretive line of business. Our capital allocation activity led to an improved portfolio through investment in community acquisitions, capital enhancements, and redevelopments. We also repurchased 6% of our shares at a 20% discount to Aimco published Net Asset Value per share. We funded these accretive investments with proceeds from the sales of our Asset Management business and properties with lower expected Free Cash Flow growth. In aggregate, we redeployed $1.1 billion of capital, increasing its expected Free Cash Flow returns by 420 basis points.

"Following a strong 2018, we expect 2019 to be another good year. We benefit from starting the year more highly occupied at our Same Store communities: 80 basis points higher than last year. Additionally, our 2018 book of business is expected to contribute 150 basis points to our 2019 Same Store revenue growth, 30 basis points greater than the 2017 contribution to 2018. Finally, Aimco's diversified portfolio provides important protection from continued building in certain markets."

Chief Financial Officer Paul Beldin adds: "Full year 2018 AFFO of $2.16 per share and Pro forma FFO of $2.47 per share both were $0.03 ahead of the midpoint of our original guidance when adjusted for transactional activity. In the fourth quarter, we refinanced $867 million of our property loans maturing in the next three years, providing annual interest savings of $13 million and increasing the size of our pool of unencumbered properties to $2.7 billion.

"In 2019, we expect Same Store revenue growth to be between 2.80% to 3.80%, and Same Store expense growth to be between 2.00% and 3.00%, resulting in Same Store NOI growth between 2.70% and 4.50%. Same Store operations are expected to add $0.11 per share, and lower interest expense to add $0.04 per share, to AFFO; this growth will be offset by lower nonrecurring income tax benefit of $0.08 per share and revenue lost from the sale of the Asset Management business and from apartment communities sold to fund investment in redevelopment and development, capital enhancements, and property acquisitions. We anticipate AFFO per share in the range of $2.12 to $2.22, up $0.01 at the midpoint from 2018. In 2019, we expect 98% of our AFFO to be derived from Real Estate Operations, providing an improved quality of earnings."

Financial Results: Full Year Pro forma FFO Up 1%; AFFO Up 2%

*See Supplemental Schedule 1 for a detailed list of Pro forma adjustments to FFO.

Net Income (per diluted common share) - Year-over-year, fourth quarter net income decreased primarily due to lower gains on the sale of apartment communities.

Pro forma FFO (per diluted common share) - Aimco's fourth quarter Pro forma FFO per share was flat year-over-year due to the following items:

• $0.02 from Same Store Property Net Operating Income growth of 3.6%, driven by a 3.4% increase in revenue, offset by a 3.0% increase in expenses;
• $0.04 Net Operating Income contribution from redevelopment communities and lease-up communities; and
• $0.04 Net Operating Income contributions from 2018 property acquisitions; offset by
• ($0.07) lower contribution from the sale of the Asset Management business and from apartment communities sold in 2018 to fund Aimco's investment activities; and
• ($0.03) lower tax benefits and other items, net.

Adjusted Funds from Operations (per diluted common share) - AFFO per share decreased $0.04 due to higher capital replacement spending in 2018, due to a greater percentage of annual spend occurring in the fourth quarter.

Operating Results: Fourth Quarter Same Store NOI Up 3.6%; Full Year Up 3.1%

* In 2018, Aimco changed its presentation of revenues and expenses to reflect utility costs net of amounts reimbursed by residents, which were previously included in revenue. 2017 amounts have been revised to conform to this presentation. The change in presentation reduced revenue growth rates in fourth quarter 2018 by 20 basis points and reduced full year 2018 by 10 basis points.

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.

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 fourth quarter, Aimco invested $51 million in redevelopment and development. Aimco continued redevelopment activities in Miami at its Flamingo South Beach and Bay Parc communities, and in Los Angeles at its Palazzo communities.

Aimco also continued its ground-up construction of Parc Mosaic, in Boulder, Colorado; and The Fremont, on the Anschutz Medical Campus in Aurora, Colorado. As previously announced, construction to build 58 townhomes on land adjacent to Aimco's Elm Creek Apartments in Elmhurst, Illinois, began in October.

In Center City, Philadelphia, Aimco completed the redevelopment of Park Towne Place, and at December 31, 2018, had leased 96% of the apartment homes at the community. This multi-year redevelopment of 940 apartment homes, amenities, and common area spaces, was executed on plan and leased-up in line with expectations, with expected Free Cash Flow returns greater than 9%.

In San Jose, Aimco completed the redevelopment of Saybrook Pointe, a 324-apartment home, garden-style community. Construction was completed on-time and in-line with underwritten costs, and lease-up of the community finished ahead of schedule and at rates above underwriting, increasing the expected Free Cash Flow return to greater than 14%, a 100-basis point outperformance to underwriting.

During the fourth quarter, Aimco leased 66 apartment homes at Redevelopment communities. At December 31, 2018, Aimco's exposure to lease-up at active redevelopment and development communities was approximately 366 apartment homes, of which 208 were being constructed at Parc Mosaic and 158 were located in four other communities. Additionally, Aimco expects to acquire One Ardmore in 2019 upon its completion, as part of the Philadelphia portfolio acquisition announced in April 2018. This acquisition will increase Aimco's exposure to lease-up risk by approximately 100 apartment homes.

Portfolio Management: Revenue Per Apartment Home Up 4% to $2,126

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.

* In 2018, Aimco changed its presentation of revenues and expenses to reflect utilities costs net of amounts reimbursed by residents, which were previously included in revenue. 2017 amounts have been revised to conform to this presentation. Including these reimbursements in revenue would have resulted in total Average Revenue per Aimco Apartment Home of $2,205 and $2,123 for the quarters ended December 31, 2018 and 2017, respectively.

Fourth Quarter Real Estate Portfolio - For its entire portfolio, Aimco's average monthly revenue per apartment home was $2,126 for fourth quarter 2018, a 4% increase compared to fourth 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 sales 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.

In December, Aimco acquired for $30 million Avery Row, a 67-apartment home community in Arlington, Virginia. Avery Row is well-located in the Washington D.C. area, approximately two miles north of the Pentagon and three miles north of Crystal City. Aimco expects its operation of this community will generate a Free Cash Flow internal rate of return of almost 9%.

Dispositions - Aimco did not sell any apartment communities in the fourth quarter.

In January 2019, Aimco sold two apartment communities with 782 apartment homes for gross proceeds of $141 million. One community was located in Schaumburg, Illinois and the other located in Virginia Beach, Virginia.

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.

* Aimco's Preferred Equity is perpetual in nature; however, for illustrative purposes, Aimco has computed the weighted average maturity of its total leverage assuming a 40-year maturity for its 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, and Adjusted Interest Expense used in its leverage ratios based on current quarter amounts, annualized.

Aimco's Adjusted EBITDA has been calculated on a pro forma basis to adjust for significant items impacting the quarter for which annualization would distort the results. Leverage ratios are elevated by 0.5x due to the use of debt to fund temporarily share repurchases completed during fourth quarter 2018. Aimco intends to reduce its Proportionate Debt and Preferred Equity to Adjusted EBITDA to 6.9x by the end of 2019 from earnings growth, primarily due to increasing contribution from same store apartment communities and reduction of debt balances due to regularly-scheduled debt amortization and apartment community sales, partially offset by the loss of earnings from communities sold.

Refinancing Activity

During the fourth quarter, Aimco addressed more than half of its property debt maturing in 2019, 2020 and 2021. Aimco placed $867 million of new loans: $740 million of fixed-rate loans at a weighted average interest rate of 4.2% and a weighted average term of 9.3 years; and $127 million of variable-rate loans with rates floating at 115 basis points over 30-day LIBOR and a weighted average term of 5.1 years. Aimco also repaid property-level debt increasing the fair value of unencumbered properties to $2.7 billion, a 50% increase during 2018. This refinancing activity results in annual interest savings of $13 million.

In connection with fourth quarter financing activity, Aimco incurred approximately $14 million of debt extinguishment costs, net of tax, which are excluded from Pro forma FFO.

Liquidity

During the fourth quarter, Aimco exercised its $200 million expansion option on its revolving credit facility, increasing the total capacity of the credit facility to $800 million.

At December 31, 2018, Aimco held cash and restricted cash of $73 million and had the capacity to borrow $633 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.

Equity Capital Activities; Special Dividend

During the fourth quarter, Aimco repurchased 8.7 million shares of its common stock for $394 million, at a weighted average price of $45.33 per share, approximately a 20% discount to Aimco's published Net Asset Value per share. Approximately half of the repurchases were funded with proceeds from 2018 and January 2019 property sales at a premium to the values ascribed to these communities in Aimco's published Net Asset Value. The remaining half of repurchases are temporarily funded with borrowings on our credit facility. We expect to repay these borrowings with proceeds from the sale of communities now under contract, again at prices greater than those used in Aimco's Net Asset Value. With the completion of these transactions, Aimco will have increased Net Asset Value per share by an estimated $0.67, or $106 million.

The 2019 property sales necessary to fund Aimco's share repurchases are expected to generate taxable gains of $285 million, which is in excess of the company's regular quarterly dividend. Accordingly, on February 3, 2019, Aimco's Board of Directors declared a special dividend on the common stock that consists of $67.1 million in cash and 4.5 million shares of common stock. The special dividend will be payable on March 22, 2019, to stockholders of record as of February 22, 2019.

The special dividend amount includes the regular quarterly cash dividend, which for 2019 will be $0.39 per share (an increase of 3% compared to cash dividends paid during 2018). Additionally, stockholders will receive $1.54 per share predominantly in stock (based on Aimco's closing price of $49.07 on February 1, 2019).

Stockholders will have the opportunity to elect to receive the special dividend in the form of all cash or all stock, subject to proration if either option is oversubscribed. Based on Aimco's closing share price on February 1, 2019, we estimate the aggregate value of the special dividend to be approximately $287.9 million, or $1.93 per share. However, the actual value will vary, depending on the price of Aimco common stock on the dividend valuation dates (March 11 and 12, 2019).

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 February 20, 2019. 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.

In summary, these transactions:

• Increase Net Asset Value per share by 1%;
• Do not affect Aimco's regular quarterly cash dividend;
• Reduce the number of Aimco shares outstanding by 6% (as a result of the share repurchases);
• Minimize the aggregate tax paid by Aimco and its stockholders;
• Are leverage neutral; and
• Result in no change in the number of shares outstanding immediately prior to the dividend (as a result of the special dividend and the reverse stock split), thereby improving comparability of per share results.

Aimco is currently authorized to repurchase an additional 10.6 million shares under its existing share repurchase program.

2019 Outlook

The Aimco strategy remains unchanged: focusing on excellence in property operations; value creation through redevelopment and occasional development; portfolio management based on a disciplined approach to capital recycling; a safe, flexible balance sheet with abundant liquidity; and a simple business model executed by a performance-oriented and collaborative team. Aimco executes this consistent strategy with an eye on sustainable long-term growth.

Aimco expects 2019 Pro forma FFO per share in the range of $2.41 to $2.51 with AFFO per share of $2.12 to $2.22. At the guidance range midpoint, Aimco's projected 2019 AFFO growth of $0.01 reflects:

• $0.11 per share growth from its Same Store portfolio;
• $0.04 from interest expense savings;
• ($0.04) per share net dilution from the Asset Management business paired trade, which includes dilution from the sale of the Asset Management business, partially offset by the reinvestment of proceeds in 2018 acquisitions and repayment of debt; and
• ($0.08) per share lower tax benefit;
• ($0.02) per share net reduction from other activities including positive contribution from redevelopment and development, offset by sales of apartment communities to fund redevelopment. Share repurchases are expected to be AFFO neutral.

Effective January 1, 2019, Aimco will adopt new accounting guidance that changes how Aimco recognizes costs incurred to obtain resident leases. In prior years, Aimco deferred certain costs based on the percentage of successful leases. Under the new standard, only costs that are contingent upon a signed lease may be deferred. Aimco's calculation of AFFO has historically included these costs as a component of Capital Replacements, therefore, it will be unchanged as a result of the change in accounting standard. The amortization of these costs was excluded from Pro forma FFO as a component of real estate related depreciation. Had the accounting change been effective in 2018, Pro forma FFO would have been approximately $0.02 per share lower than reported.

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 132 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 first quarter and full year 2019 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 redevelopment and development investments; expectations regarding Aimco sales of apartment communities and the use of proceeds thereof; 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.

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