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Apartment Investment and Management Company (AIV - Analyst Report), or Aimco as the real estate investment trust (REIT) is popularly known, reported fiscal 2012 first quarter funds from operations (FFO) of $48.4 million or 40 cents per share compared to $45.8 million or 39 cents in the year-ago period. Funds 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.

The reported FFO for first quarter 2012 was 5 cents above the midpoint of its previous guidance and 3 cents ahead of the Zacks Consensus Estimate. The strong quarterly earnings were primarily due to better-than-expected operating results and offsite cost savings.

During the quarter, total revenues stood at $273.8 million, compared to $264.0 million in the year-ago period. Total revenues for the reported quarter surpassed the Zacks Consensus Estimate of $259 million.

In the conventional real estate portfolio, which includes a diversified range of market rate apartment communities, Aimco had a weighted average ownership of 96%. Average rents in the same-store conventional real estate portfolio increased 4.2% during the quarter to $1,132 per unit from $1,086 during first quarter 2011.

Rental rates on new leases in the conventional real estate portfolio were 2.0% higher than the expiring lease rates. First quarter 2012 renewal rates were 5.1% higher than the expiring lease rates. Same-store revenues in the conventional portfolio increased 4.2% year-over-year to $193.3 million, while net operating income (NOI) increased 6.8%.

In the affordable real estate portfolio, which includes properties with rents that are generally paid (in whole or in part) by a government agency, Aimco had a weighted average ownership of 73% during the quarter. Average occupancy was 98.0% at quarter-end, while average rent per unit increased 2.8% from $922 to $948.

Same-store revenues in the affordable real estate portfolio increased 2.9% year-over-year, while NOI increased 1.8%. Conventional property operations generated 88% of Aimco’s first quarter 2012 NOI, while affordable real estate portfolio generated the balance 12%.

Aimco is continuing with its strategy to focus on the 20 largest markets in the U.S. that are concentrated mostly in the coastal areas and also includes a number of Sun Belt cities, Chicago and Illinois. During first quarter 2012, NOI from conventional real estate portfolio located in target markets accounted for 85% of the total conventional real estate portfolio NOI.

Going forward, the company expects to reduce its investment in non-target markets through asset sale transactions, and consequently increase its investment in target markets through redevelopment and acquisitions.

During the reported quarter, Aimco acquired non-controlling limited partnership interests in 7 consolidated real estate partnerships (that own 13 properties with average revenues of $975 per unit) for $38.5 million. The company also acquired a 488-unit property in Phoenix, Arizona, for $68.8 million, including the assumption of $29.1 million of non-recourse fixed rate debt.

Aimco sold 3 conventional properties (908 units) and 6 affordable properties (577 units) during the quarter for $89.7 million of total gross proceeds, bulk of which was used to repay debt. Aimco expects to sell over 25 conventional properties and at least 60 affordable properties for $550 to $650 million in the current fiscal year.

Furthermore, the company expects to sell almost all of its affordable properties over the next four- to five-year period to concentrate entirely on the conventional real estate portfolio.

During the reported quarter, Aimco continued with the redevelopment work of Pacific Bay Vistas – a vacant 308-unit property in San Bruno, California. In addition, the company also began a redevelopment project at The Palazzo at Park La Brea – a 521-unit property in West Los Angeles, for an expected total investment of $15.3 million.

At quarter-end, Aimco had a total debt of $5.6 billion and cash and cash equivalents of $83.2 million, with debt service and fixed charge coverage ratios of 1.62x and 1.38x respectively. Aimco’s recourse debt at March 31, 2012, was limited to its revolving credit facility. At quarter-end, Aimco had $67.4 million outstanding on its revolving credit facility, and available capacity was $402.1 million, net of $30.5 million of letters of credit backed by the facility.

With strong quarterly results, Aimco increased FFO guidance for full-year 2012 from the range of $1.72 - $1.82 per share to $1.76 - $1.84, while FFO for second quarter 2012 is expected in the range of 40 cents to 44 cents.

We maintain our long-term Neutral recommendation on the stock, which presently has a Zacks #3 Rank translating into a short-term Hold rating. We also have a Neutral recommendation and a Zacks #3 Rank for Equity Residential (EQR - Analyst Report), one of the competitors of Aimco.

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