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On Mar 13, 2014, we issued an updated research report on the residential real estate investment trust (REIT) – Apartment Investment and Management Company (AIV - Analyst Report) – better known as Aimco.

On Feb 6, Aimco reported pro forma funds from operations (FFO) of 57 cents per share for fourth-quarter 2013, a penny ahead of the Zacks Consensus Estimate and a nickel above the year-ago quarter figure.

Improved property operating results and lower offsite costs drove the year-over-year rise in pro forma FFO. However, the results were partly dwarfed by higher interest expense and lower income from discontinued operations.

We believe that Aimco’s strong portfolio of B/B+ geographically diversified assets and the expected rise in demand for apartment properties driven by ‘echo boomers’ position it well for growth in the future. Moreover, the company’s current focus on selling its lowest-rated portfolio and reinvesting the proceeds to boost its Conventional portfolio is a strategic fit for strengthening its overall portfolio quality. The company also hiked its dividend by over 8% in recent months.

Yet, we expect an adverse impact on earnings in the near term from these asset dispositions. Apart from this, though Aimco is focusing on improving its balance sheet, we notice that the leverage level is still high. This lowers the company’s financial flexibility and impedes its growth momentum to some extent.

In addition, a rise in interest rates is anticipated in the long run on the Fed’s withdrawal of its stimulus program, which in turn would raise the company’s interest expense. Therefore, we have a balanced view on this stock.

Notably, Aimco has reported an average earnings surprise of 2.00% in the trailing four quarters of 2013. However, over the last 30 days, the Zacks Consensus Estimate for 2014 declined 3.7% to $2.08 per share and for 2015 it dropped to 1.7% to $2.29 per share. The stock currently has a Zacks Rank #4 (Sell).

Stocks that Warrant a Look

Some better-ranked stocks in the residential REIT industry include BRE Properties Inc. , Education Realty Trust, Inc. (EDR - Snapshot Report) and UDR, Inc. (UDR - Analyst Report). All three stocks have a Zacks Rank #2 (Buy).

Note: FFO, 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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