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Apartment Investment and Management Company (AIV - Analyst Report) – better known as Aimco – reported pro forma funds from operations (FFO) of 50 cents per share in third-quarter 2013, in line with the Zacks Consensus Estimate, but exceeding the year-ago figure by 4 cents. Notably, this was equal to the midpoint of the company's outlook range of 48–52 cents.

The quarterly rise was aided by enhanced property operating results, extra interest income earned on the West Harlem property loans, lower interest expense owing to refinancing and low offsite costs. It was, however, partially offset by low income from discontinued operations and low investment management income.

Total revenue was $254.5 million, up 0.7% year over year, and surpassed the Zacks Consensus Estimate of $249 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 flat year over year to 95.3% and average rent per unit increased 3.7% year over year to $1,248. Furthermore, average revenue per unit in the same-store portfolio upped 4.4% year over year to $1,404.

Rental rates on new leases and renewals in the portfolio were up 1.7% and 5.1%, respectively, from the expiring lease rates. Same-store revenues increased 4.4% year over year to $188.3 million while expenses rose 1.6% year over year to $64.5 million. Consequently, same-store net operating income (NOI) climbed 5.9% to $123.8 million on a year-over-year basis.

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 remained flat year over year at 98.9% in the quarter. In addition, average revenue per unit rose 1.1% year over year to $980.

Portfolio Restructuring Activity

During the reported quarter, Aimco acquired a Class A building (30-apartment home) for $9.5 million in Midtown Atlanta. The monthly average revenue per unit for the asset is around $2,100 and its rents are 165% higher than the market’s average rent.

Also, the company bought a Watertown, Mass.-based Class B+ community (44-apartment home) for $15.1 million. The property’s monthly average revenue per unit is $2,200 and its rents are 19% higher than the average rent of the market.

Moreover, Aimco divested 5 Conventional (1,959-apartment homes) and 3 Affordable (321-apartment homes) assets for gross proceeds of $166.9 million. The company’s share of proceeds was $57.2 million, following distributions to limited partners, paying back of existing property debt and transaction costs.

During the reported quarter, Aimco penned a deal with Trinity Financial for the construction of a 12-story building at One Canal Street in the Bulfinch Triangle neighborhood of Boston’s West End. Built on a 99-year ground leased to Aimco, this project will comprise 310 luxury apartment homes, around 22,000 square feet of commercial space and 147 parking spaces.

Aimco envisages making investments of around $190 million in the next two and one-half years for developing this project. Notably, Aimco plans to sell lower-rated properties in Colorado, Indiana, Massachusetts and Texas to finance the equity part of the deal.

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.

Liquidity

As of Sep 30, 2013, Aimco had cash and restricted cash on hand of $183.3 million, up from $157.8 million in the 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 $298.6 million on its revolving credit facility, while available capacity was $255.6 million, net of $45.8 million of letters of credit backed by the revolver.

During the quarter, Aimco closed on a new revolving credit facility worth $600 million to replace its existing $500 million facility. Notably, the new revolver’s interest rate spread is, on an average, 70 basis points lesser than the replaced facility. The new facility will mature in Sep 2018 and includes a one-year extension option.

Dividend

Concurrent with the earnings release, Aimco declared third-quarter 2013 cash dividend of 24 cents per share of its Class A common stock. The dividend is payable on Nov 29 to shareholders of record as of Nov 15, 2013.

Outlook

For fourth-quarter 2013, Aimco expects pro forma FFO per share in the range of 53–59 cents. For full-year 2013, the company narrowed its outlook and now expects pro forma FFO per share in the range of $2.00 – $2.06 (prior range being $1.99 – $2.07).

Our Take

Aimco’s decent third-quarter 2013 results came on the back of improved operating property performance. The company’s focus on expanding its footprint across U.S.’s target markets through portfolio repositioning activity bodes well. In particular, Aimco’s successful divestiture of affordable assets, which scaled down from 250 properties (3 years ago) to 79 (at the quarter end) is appreciable.

However, the steady housing market recovery and rise in supply in the Sunbelt regions, which are expected to partially hamper the overall growth in rents along its operating regions, remains a matter of concern for this Zacks Rank #4 (Sell) stock.

Better-performing apartment REITs include BRE Properties Inc. , Education Realty Trust, Inc. (EDR - Snapshot Report) and American Residential Properties, Inc. (ARPI - Snapshot 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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