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Apartment Investment and Management Company (AIV - Analyst Report) – better known as Aimco – reported pro forma funds from operations (FFO) of 49 cents per share in second-quarter 2013, beating the Zacks Consensus Estimate by a penny and the year-ago quarter’s FFO per share by 3 cents. Notably, this was equal to the high end of the company's outlook range of 45–49 cents.

The quarterly increase at this real estate investment trust (REIT) was attributable to improved property operating results and lower preferred share dividends. It was, however, partially offset by lower income from discontinued operations. On the other hand, Adjusted FFO (AFFO) was 37 cents per share, up 9% from 34 cents in the year-ago period.

Total revenue was $259.7 million, up 3% year over year, and surpassed the Zacks Consensus Estimate of $243 million.

Behind the Headlines

Conventional real estate portfolio: This includes a diversified range of market-rate apartment communities. In the same-store portfolio, the average daily occupancy was up 10 basis points (bps) year over year to 95.5% and average rent per unit increased 4.1% year over year to $1,212. Moreover, average revenue per unit in the same-store portfolio upped 5.0% year over year to $1,363.

Same-store revenues increased 5.1% year over year to $192.0 million while expenses rose 4.8% year over year to $67.4 million. Consequently, net operating income (NOI) climbed 5.3% to $124.6 million on a year-over-year basis.

Rental rates on new leases and renewals in the portfolio were up 3.1% and 5.2%, respectively, from the expiring lease rates.

Affordable real estate portfolio:This includes properties for which rent is generally paid (in whole or in part) by a government agency. In the same-store portfolio, the average daily occupancy upped 30 bps year over year to 99.0% in the quarter. In addition, average revenue per unit increased 0.7% year over year to $976.

Portfolio Restructuring Activity

During the reported quarter, Aimco purchased a Class A 60-home building for $29.0 million in California. Subsequent to quarter-end, the company acquired another Class A 30-home building for $9.5 million in Midtown Atlanta.

Moreover, as per its strategic initiative, Aimco sold 2 Affordable Properties (164-home) for $6.5 million. Aimco's share of net sales proceeds was $1.8 million, following distributions to limited partners, paying back of existing property debt and transaction costs.

During the reported quarter, Aimco finished the Baywalk redevelopment project at Flamingo South Beach. Moreover, the company carried on with the redevelopment of 5 properties, which it had commenced in the prior year. Furthermore, it continued redevelopment work on multi-phase capital projects, namely Park Towne Place and The Sterling located in Center City Philadelphia and 2900 on First in Seattle.

West Harlem Property Loans Buyouts

In 2006, Aimco financed $100.1 million of second mortgage loans collateralized by 84 buildings in the West Harlem neighborhood of New York City. Simultaneously, Aimco inked a deal with the borrower, according to which the former had the option to buy the properties and the borrower had the right to put the assets to Aimco upon realization of certain revenue thresholds.

In the said quarter, Aimco acquired at par the first mortgage loans related to those buildings for $119.1 million. Out of this amount, $106.0 million matured on Jun 1. As part of the first mortgage loans acquisition deal, Aimco will receive all loans from the borrower by Nov 22, 2013 and $11 million for the unexercised option to buy the properties. Notably, the borrower’s right was terminated. 

Dividend

On Jul 30, 2013, Aimco declared second-quarter 2013 cash dividend of 24 cents per share of its Class A common stock. The dividend is payable on Aug 30 to shareholders of record as of Aug 16, 2013.

Liquidity

As of Jun 30, 2013, Aimco had cash and restricted cash on hand of $157.8 million, down from $193.9 million in past quarter. Moreover, there were 4 unencumbered properties, with an estimated fair value of around $190 million.

Furthermore, as of that date, Aimco had outstanding borrowings of $187.1 million on its revolving credit facility, while available capacity was $268.4 million, net of $44.5 million of letters of credit backed by the revolver.

During the quarter, Fitch Ratings assigned Aimco a credit rating of "BB+" and a Positive Rating Outlook, after concluding the initial review of Aimco's creditworthiness.

Guidance

For third-quarter 2013, Aimco expects pro forma FFO per share in the range of 48–52 cents. For full-year 2013, the company narrowed its outlook and now expects pro forma FFO per share in the range of $1.99–$2.07 (prior range being $1.94–$2.10).

Our Viewpoint

We are encouraged by the impressive second-quarter results of this Zacks Rank #3 (Hold) stock, which came on the back of strong operating portfolio performance. Moreover, Aimco’s successful portfolio enhancement activity, through the continued disposal of non-core assets, strengthens its position in high-growth potential markets.

Other apartment REITs that are performing better and are worth a look include Camden Property Trust (CPT - Snapshot Report), Campus Crest Communities, Inc. (CCG - Snapshot Report) and UDR Inc. (UDR - Analyst Report). All these stocks carry a Zacks Rank #2 (Buy).

Note: Fund from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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